Wolverine World Wide Inc (WWW) 2010 Q2 法說會逐字稿

Good morning, and welcome to Wolverine World Wide's second-quarter 2010 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 begin.

Thank you, Jamie. Good morning, everyone, and welcome to our second-quarter 2010 conference call. On the call today are Blake Krueger, our Chairman, CEO and President, and Don Grimes, our Senior Vice President and CFO.

Earlier this morning, we announced our second-quarter 2010 results. If you did not yet receive a copy of the press release, please call Abby Brant at 616-233-0500 to have one sent to you. The release is also available on many news sites, or it can be viewed from our corporate website at www.WolverineWorldWide.com.

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

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

Thanks, Christi. Good morning to everybody, and thanks for joining us. This morning, we reported outstanding financial results for the second quarter, including our second consecutive quarter of record gross margin and earnings per share. The positive momentum in our business that began in Q4 of 2009 certainly continued through the second quarter. Our order backlog at quarter-end was the highest in recent memory.

We are very encouraged by our strong performance in the first half of 2010, and see it as further evidence that our unique business model performs well in any economic environment.

We are poised to deliver strong revenue growth in the second half and gain additional market share in the 180 markets we serve globally. Our powerful portfolio of brands generates excitement and is performing across a wide spectrum of consumer segments. Retailer interest and support for our brands continues to grow, as we consistently generate exceptional sell-through for our retail partners.

In addition, our consumer direct business, which includes both our brick-and-mortar stores and our e-commerce operations, is growing at an accelerated pace.

Overall, I am proud of our year-to-date performance and believe we are firing on all cylinders going into the second half of the year. Today, we have raised our 2010 revenue and earnings guidance. Our seasoned management team remains focused on executing against our business model and delivering exceptional results, despite continuing microeconomic uncertainties.

Now I will spend a few moments sharing some important highlights about the progress we are making with our key brands, starting with the Hush Puppies group. Retail expansion of the Hush Puppies brand around the world is an important strategic initiative, and we made further progress in the second quarter. New-concept stores were opened in Singapore, Malaysia, Taiwan, Japan, South Africa, Chile and Columbia, bringing the global store count to 540, to go along with nearly 1220 shop-in-shops.

Recent product innovations continue to fuel a strong order backlog position in the Hush Puppies business. The "Body Shoe" concept is retailing well, and is poised to take advantage of both the health and wellness and toning and shaping trends.

We are also very excited about the 1958 collection, which features premium vintage products inspired from our archives. Better retailers, including Nordstrom, Bloomingdale's, The Bay in Canada, Isetan in Tokyo, along with a number of other better independents, have signed on to feature these products beginning this fall.

Cushe, our action sports lifestyle brand targeting younger consumers, continues to deliver outstanding growth. Sales were up significantly, especially in the US, driven by excellent placement we secured in better department stores, such as Nordstrom, and specialty outdoor and surf retail venues. The early momentum of Cushe highlights our ability to successfully integrate newly-acquired brands and quickly leverage our extensive network of global distributors.

During the quarter, we expanded the Cushe brand into Australia, Switzerland and Scandinavia, bringing the total number of markets served to 53. We continue to invest in the brand and related infrastructure, and view Cushe as a significant growth opportunity for the Company.

I would now like to turn to the Heritage Brands Group, which consists of Sebago, as well as our two largest licensed footwear businesses, Caterpillar and Harley-Davidson. For Sebago, we launched the 40th anniversary Docksides initiative during the quarter, which is driving strong at-once sales in both the US and European markets, and also capitalizes on one of this year's leading fashion trends.

Our 1946 Limited Edition Collection further elevated the brand's profile and attracted new retail partners and younger consumers to the Sebago brand. Our investments in brand infrastructure have helped us gain expanded distribution in Nordstrom, Saks, Urban Outfitters, all of those in the US, and with influential lifestyle accounts such as Kurt Geiger and KaDeWe in Europe.

We also launched e-commerce websites for Sebago in France, Germany and the UK during the quarter, and lifestyle concept stores were opened in Spain, Norway, Sweden, UK, Saudi Arabia and Venezuela, bringing the total number of Sebago concept stores to 43.

We continue to be excited by Sebago's global potential, accelerated growth for the brand, and the development of Sebago as a lifestyle brand -- that is footwear, apparel and accessories -- continues to be one of our key strategic initiatives.

Turning to CAT footwear, we were very encouraged by positive customer reactions to our new CAT product launches, including our global Earthmover's product introductions and campaign.

As the global economy recovers, we are experiencing strong growth in our industrial footwear business. The sell-through of the Flexion ergonomic boot package has surpassed our expectations in North America. In Europe, we have also had strong results from our preferred supplier status with the Royal Mail in the UK.

This past quarter, a CAT retail store was opened in China, and excellent early results support the decision to open additional stores in Chile, Peru, Panama, Mexico and Dubai by year-end. These flagship locations will help further build the brand and bring the CAT lifestyle to a new generation of consumers.

We continue to be excited about the long-term growth prospects for Harley-Davidson footwear, as economic conditions in the most significant markets for the Harley-Davidson motorcycle brand continue to improve. In the meantime, we remain focused on creating, marketing and selling compelling product, a winning strategy that has proven itself over time.

Let's turn to the Wolverine Footwear Group, which includes Bates, HYTEST, and Wolverine. The Wolverine Brands' authentic positioning and commitment to product innovation continues to drive success. While retaining its position as the leader in the core work category, Wolverine is experiencing strong growth in the rugged casual category, driven by the 1000-Mile Boot and Wolverine Individual Comfort System programs. Retail sell-through in premium and better grade distribution channels has been outstanding for these two lines, and backlogs for the remainder of 2010 are up significantly.

While our Wolverine brand apparel program is still relatively small and focused in the US, we continue to build momentum. We are seeing tremendous enthusiasm from footwear retailers, who are embracing the apparel program as a means to create excitement and drive incremental sales in their stores. Backlog for the remainder of the year is up triple digits, and we expect the program to be a future source of significant growth for the brand.

The Bates business remains committed to being the leading footwear provider for all branches of the US military, as well as the US and global civilian uniform markets, which grew at a strong double-digit pace during the quarter. We were also very pleased in the quarter to secure a multi-year contract award to manufacture Bates leather oxfords for the Air Force. Positive momentum continues for the Bates brand.

The Outdoor Group, which consists of Merrell, Patagonia Footwear and Chaco, is the Company's largest operating group in terms of both revenue and profit, and has grown at the fastest rate of our operating groups for the first half of the year.

Merrell has been our key growth engine for the past decade, and it will continue to be the biggest source of growth for the Company for the foreseeable future. The brand's global potential is simply enormous.

We have reorganized the brand's product development team with new leadership and dedicated resources for men's, women's and children's offerings. We've also added talented professionals in both sales and marketing in order to target specific revenue opportunities by product segment and geography, and we've increased the frequency and points of contact with our consumers. All of these investments designed to increase the overall awareness of the brand.

Beginning with the Merrell Outventure -- that is the outdoor performance category -- it continues to generate excellent growth and to solidify the brand's position as the leader in the performance outdoor segment. Building on this leadership position, Merrell, in alliance with Vibram, launched its new Barefoot collection for the spring 2011 season. This collection is generating tremendous buzz in the athletic fitness and outdoor channels. Merrell will be the exclusive outdoor partner with Vibram for the Barefoot initiative, which will appeal to a much wider range of consumers than Vibram's existing Five Fingers program. The Barefoot collection is already generating substantial interest from our existing customers, and we expect it to be a significant growth driver.

The double-digit Q2 growth in Merrell's Fusion -- that is the outdoor casual collection -- was fueled by men's casual introductions, including the new World collection. We are also experiencing very good sell-through of our next generation of women's Land Sandals and the new Zenith collection of leather slip-ons.

Merrell Apparel continues to make significant progress, and retailer sell-through this spring was simply excellent. This sell-through momentum and retailer confidence in the brand has translated into strong fall 2010 sell-in and a strong double-digit order backlog increase for both our sportswear and outerwear categories.

Retailers have enthusiastically responded to our versatile styles and technology, including the Merrell Sleep Stuff innovation that converts a garment into a neck pillow for traveling, camping or just relaxing on the go.

The Merrell Apparel program is an important component of the group's future growth plans, and has helped the brand to accelerate the opening of Merrell Lifestyle stores around the world. Merrell ended the quarter with about 122 branded stores and nearly 950 shop-in-shops. In the quarter, new stores were opened in Japan, the Philippines, Mexico, Panama and Korea.

We continue to make investments in our Merrell consumer direct business, and this investment is being rewarded with outstanding comp store increases in our own brick-and-mortar stores and strong double-digit growth from our Merrell e-commerce business.

Patagonia Footwear continues to gain momentum in the marketplace. Our lightweight, versatile hiker, the Drifter A/C, won Outside Magazine's prestigious Summer 2010 Gear of the Year award. We continue to draw inspiration from Patagonia's environmentally friendly heritage to expand our product offering. Recent launches focused on women's and younger, more progressive consumers are performing very well at retail.

Turning to Chaco, which is our pure outdoor adventure brand, the Spring '10 product offering is performing very well. Following the brand's acquisition early last year, we quickly learned that there was a pent-up demand for the brand in the US, a belief underscored by the phenomenal success of Chaco's online business, which has tripled and is now the Company's number two branded website behind only Merrell.

This performance supports our aggressive growth expectations, as we make this brand and creative product more accessible to consumers. Many retailers are now looking to expand their Chaco business, especially with the introduction of our Fall 2010 closed shoe offerings. Chaco continues to be a major growth opportunity for the Company.

Growing our own consumer direct business remains one of our key growth strategies. Positive momentum for our own retail operations started in the second half of 2009 and has continued this year. Our consumer direct initiatives are providing meaningful growth for the Company, but also continue to help us better connect with our consumers in both retail stores and, increasingly, online.

The outstanding performance of our own retail venues, with Q2 comps up double digits, underscores the fact that we can perform well in a sluggish economy if there is an emotional connection with the consumer and the product offerings are trend right, properly priced and of the highest quality. Our brand portfolio delivers on all of these attributes, and the consumer is responding.

Our e-commerce business had an especially good Q2.

Overall, we are very pleased with the continuing momentum for all of our brands and the outlook for the second half of 2010 and 2011. While much has been written about the global macroeconomic conditions and the general retail environment, our consumers are sending us a clear message. They love our lifestyle brands, innovative designs and technology-driven features, and they are buying our products.

As a consumer category, footwear continues to outperform despite some of the recent mixed macro economic news. Our order backlog at the end of the quarter was up very strong double digits, a sign of the future growth in momentum of our business and a testament to the value we deliver to our customers. In part, our significant backlog increase reflects more aggressive future order patterns from our customers, who have partnered with us to identify key programs and commit to fall deliveries earlier than the historical norm.

Nevertheless, the significant backlog increase is indicative of the positive trend in our business.

Our growth prospects are very good for the current fiscal year, but the industry as a whole is faced with unplanned supply chain challenges affecting freight and product costs, especially in the second half of the year and into the first half of 2011. As a Company, we are partnering with our own suppliers and customers to work through these challenges and, where appropriate, implement price increases to offset higher input costs.

I'm obviously extremely proud of the Wolverine team for the progress we are making on key growth initiatives and for providing the springboard for what should be an excellent second half.

I will now turn the call over to Don Grimes, our CFO and Senior Vice President, who will provide you with some details regarding our Q2 results and our outlook for the remainder of the year. Don.

Thank you, Blake, and good morning, everyone. Earlier this morning, we were very pleased to report yet another quarter of outstanding financial performance, with solid organic revenue growth, record gross margin balanced against strategic brand-building investments to fuel future growth, and importantly, record earnings per share. These excellent financial results, delivered on the heels of record first-quarter earnings and a 2009 fiscal year in which we generated constant-currency, adjusted EPS growth in an incredibly challenging global economic environment, underscore the power of Wolverine's business model. This consistent performance, combined with well-developed plans for future growth and a track record of execution and strong cash flow generation, make Wolverine a compelling investment opportunity at almost any time, and even more so today, given the favorable momentum in our business.

Turning to the second quarter's results, reported revenue for the quarter was $258.2 million, a solid 4.8% increase compared to the prior year. Robust organic growth from the portfolio was partially offset by expected lower closeout sales from several brands, particularly Merrell, and a delay at quarter-end of a significant shipment of Merrell and Caterpillar product to a third-party distributor, the latter of which will benefit reported revenue in the third quarter.

Foreign exchange had a very minimal impact on reported revenue in the quarter, as a benefit from a stronger Canadian dollar was almost completely offset by relatively weakness in the euro and British pound.

By operating group, our Outdoor Group led the way, with $97.9 million of revenue in the quarter, 5.4% growth over the prior year. Strong performance by Merrell's footwear in the US and Canada, Merrell Apparel and Patagonia was tempered by significantly lower closeout sales and the delay in the shipment to the third-party distributor just mentioned. The Outdoor Group still delivered double-digit revenue growth in the first half of the fiscal year.

Our Wolverine Footwear Group had an especially strong performance in the quarter, with revenue at $54.9 million, 10.3% growth versus last year, driven by consistently strong at-once business throughout the quarter. Every brand and major geography in the Wolverine Footwear Group delivered revenue growth, demonstrating the breadth of the progress being made there.

Our Heritage Brands Group had revenue of $44.3 million, slightly below last year, as double-digit growth from Caterpillar in Europe and the US, the brand's two biggest geographies, was partially offset by the impact of the delayed shipment late in the quarter.

The Hush Puppies group had revenue of $25.6 million, down 5.5% versus last year, as lower closeout sales for the Hush Puppies brand more than offset growth in the US for both Hush Puppies and Cushe, and growth in the group's very profitable third-party licensing business.

Our other business units delivered impressive 16.8% revenue growth to $33.1 million, led by strong organic growth from our consumer direct businesses and a resurgence in demand for leather from our Wolverine leathers business. Taken as a whole, it was a very solid quarter of revenue performance for the Company.

Turning to gross margin. Adjusted for restructuring charges and cost of sales in both years, gross margin expanded 250 basis points to a record 40.3%, driven by fewer low-margin closeout sales, modestly lower product cost, the benefits from selling price increases and efficiencies from the Company's now-completed restructuring program, all of which more than offset higher freight costs.

Adjusted for restructuring charges in both years, operating expense in the second quarter increased 5.4% to $76.7 million, or 29.7% of sales, compared to $72.8 million, or 29.6% of sales, in the prior year. More than half of the quarter's $3.9 million increase was driven by incremental strategic investments in marketing initiatives and sales force infrastructure, investments that will help drive revenue and gross profit growth in future periods.

The effective tax rate for the quarter was 29% compared to 32.3% in the prior year, reflecting the benefits from international tax planning strategies implemented during 2009.

Fully-diluted weighted average shares outstanding in the quarter were $49.0 million.

Finally, and perhaps most importantly, diluted earnings per share in the quarter, adjusted for $0.04 per share of restructuring and related charges, grew 44.4% to a record $0.39 per share.

Foreign exchange, primarily maturing foreign currency forward contracts, had a negative $0.03 per share impact on reported earnings.

We continue to tightly manage working capital, as total inventories were down 7% at the end of the second quarter to $170.8 million, and accounts receivable were essentially flat with the prior year.

The Company repurchased approximately 753,000 shares in the open market during the quarter for $22.6 million, and year-to-date, we've repurchased 1.6 million shares for a total cost of $47.1 million. We have approximately $158 million remaining on our February 2010 $200 million share repurchase authorization.

We believe that the Company's financial flexibility remains a competitive advantage. Free cash flow remains exceptionally strong, and we finished the quarter with cash and cash equivalents in excess of $110 million.

Our expected uses of cash going forward are aligned with our business strategies -- invest in growth initiatives for existing brands, fund potential new acquisitions, maintain our dividend and repurchase shares as appropriate.

As Blake mentioned earlier, we remain pleased with our incoming order trend, and we ended the quarter with an order backlog that was up at very high double-digit percentage growth versus the prior year. As a result of our solid first-half performance and strong backlog position at the end of the second quarter, we are raising our full-year revenue guidance to a range of $1.19 billion to $1.22 billion, representing growth of 8.1% to 10.8% versus the prior year. This increased full-year estimate implies second-half revenue growth in a range of 7.9% to 13.0% on a reported basis, and even more robust constant currency growth when you factor in an estimated negative FX impact of $15 million to $20 million in Q3 and Q4.

We are extremely pleased to increase our full-year earnings per share guidance, excluding $0.06 per share of restructuring charges, to a range of $1.98 to $2.04, representing excellent growth of 11.9% to 15.3% versus the prior year.

As Blake also noted, the industry is experiencing unexpectedly steep and swift product cost increases that reflect both increases in raw materials, labor and freight and constrained capacity. We are relentlessly pursuing strategies to overcome these negative environmental factors, including implementing selective selling price increases, shifting factory production, leveraging owned manufacturing operations, reengineering product as appropriate, maximizing container utilization to the fullest extent possible and ordering ahead of announced factory cost increases.

Despite our efforts, Wolverine, like most of the industry, is expecting incremental pressures on gross margin in the second half of this fiscal year. Additionally, last year's fourth quarter benefited from a $2.2 million reduction in our LIFO reserve due to lower year-end inventories and lower product costs, and we are currently projecting an approximate $400,000 increase in the LIFO reserve this year, representing a negative $2.6 million year-over-year swing to GAAP earnings, though a benefit to current cash flow.

Taken all together, we now expect full-year gross margin to be approximately flat with the prior year. We are still projecting mid-single-digit growth in full-year operating expenses, driven to a large extent by the brand-building investments behind key growth initiatives, and we are still guiding to a full-year 29% effective tax rate.

We've had a very successful start to the 2010 fiscal year and are pleased this momentum of our business has enabled us to increase both revenue and earnings guidance today. Wolverine has a long and well-established track record of consistently delivering strong financial results, while building the foundation for future growth and returning cash to shareholders as appropriate. Through the first two quarters of the year, Wolverine has returned just shy of $58 million to our shareholders in the form of dividends and share repurchases.

Thank you for joining us today, and I will now turn the call back over to Blake for some closing comments.

Thanks, Don. We are obviously excited to have delivered another quarter of excellent financial performance, which is the result of a great team proactively leveraging a proven business model. We remain optimistic on our ability to deliver outstanding results for the remainder of 2010 and beyond.

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

(Operator Instructions) Chris Svezia, Susquehanna Financial Group.

Nice job on the quarter. I want to get your thoughts on the gross margin outlook, based on the kind of guidance you are giving here, which assume flat second-half earnings. I am thinking about what you are doing timing-wise with regards to some of these offsets with the pricing. How much pressure should we see on the gross margin as we go into the second half?

I'm just trying to understand a little bit better. Based on the improving backlog trends, inventory is in good shape. Why wouldn't there be more opportunity on the gross margins, even with the FX currency hedge rates becoming a little more favorable, for you guys in the second half. Maybe just walk through that a little bit more.

I guess year-to-date, our gross margin, adjusted for restructuring, is up 150 basis points. And if you do the math, and get to the flattish gross margin for the full year, given that the third quarter is our biggest quarter in terms of revenue by period, and then also the fourth quarter has an extra period in it, given the number of weeks in our fourth quarter, you certainly can force that negative gross margin in the second half of the year.

And as I'm sure you can appreciate, there are a lot of moving parts to our full-year gross margin, or to our gross margin in any quarter. The positives for the second half of the year include continuing benefits from our restructuring program, although at a lower rate, given that we are (inaudible) against time periods last year, when we had restructuring benefits in some of the financial results.

We are still looking at lower closeout sales in the second half of the year, which is a positive to gross margin, and slightly higher year-over-year selling prices. Those are all positives to gross margin in the second half.

However, they are being more than offset by higher product costs, which we had alluded to in our prior earnings call, higher freight, which we had alluded to at the end of Q1, but it's even more significantly negative now, the negative accounting changes that I talked about, which we knew about at the end of Q1, and then also some additional negative FX in the second half of the fiscal year.

So when you net out all the negatives versus all the positives, there is a net negative impact on gross margin in the second half of the year, which leads us to guide to full-year gross margin in the flat range.

In terms of pricing inflation, what you are seeing there? Can you give us any sense of a magnitude of what you are seeing in the second half on product?

On product cost?

Right.

We are seeing across-the-board -- of course, we have the 12 brands in the portfolio and we have a number of different factories -- but across-the-board, we are looking at product cost increases in the second half in the mid-single-digit range.

Okay. Are you going to start taking out pricing again towards the second half of this year, or is it more as you look to your Spring buys for next year? Is that where the opportunity is to be taking out pricing?

We've had a few brands that have already taken pricing action, such as some of our boot brands. And we have some other brands that are looking closely at it and plan to take some pricing action starting in the fourth quarter and next year as well.

So far, we frankly have had very little resistance or pushback from our retail partners on price increases.

Okay.

Chris, we did have some price increases in the plan for the second half of the year, in response to some unexpected increases in certain factories' FOBs. Certain brands are implementing selective additional price increases in the latter part of the year. There will be a modest impact to 2010 results from those.

Okay. Could you quantify by any chance how much your backlog is up? In the past, it was 30%.

Yes, it's up a little over 38%.

Okay. That's great. And the last question I have is in international versus domestic growth. Can you maybe talk about more specifically what is happening in Europe and in some of your international markets? You talked about Canada and what's going on there, but maybe more what's going on in the UK, Germany, France, things of that nature.

As we take a quick look back at Q2, the United States and our distributor international markets were probably our strongest performing geographic sectors. So Europe, as we've thought all along, is going to lag the US in the recovery, and some of the other developed markets around the world. We expect Europe to lag a quarter, two quarters, maybe three quarters a little bit, just to trail us. Europe trailed us going into the recession and it appears Europe is going to trail us coming out of the recession.

So to focus a little bit more on Europe, it is a bit of a mixed bag. You know, our boot businesses remain pretty strong in Europe. They represent real heritage product, authentic brands, and that is certainly a fashion trend right now. And the European markets as a whole are recovering, we believe, but it's going to be a slower recovery, just like most of the recovery in the United States and around the world.

Chris, to follow up on what Blake said, as a percent of the whole, our business from Europe is less in this year's Q2 than it was last year. And that is being driven by, as Blake mentioned, the more tepid economic conditions, but also there was negative FX in Q2 as it relates to the pound and the euro, which therefore, on a dollar basis, will drive it down as a percent of the whole.

Okay, thanks very much, guys. Best of luck.

Kate McShane, Citigroup.

Actually, this is B.G. Dickey sitting in for Kate this morning. Just had a general kind of high-level question, if I could get a sense from you guys what your impressions are from the retailers themselves in this environment and if you are seeing any kind of changes to the ordering patterns.

I guess just to focus on the footwear industry, we've all read some of the mixed macro economic news that is out there, but the footwear retailers and the footwear sell-throughs continue to be pretty good.

Our retailers are cautious given some of the macro news, but the actual performance of footwear stores and the footwear category continues to be a leader out of this recessionary environment. Certainly, that is true for our brand. So our efforts last year to double-down on product innovation and product development, invest in sales force and selling initiatives, are really paying fruition this year.

Okay, and so I guess --.

Overall, we remain pretty optimistic.

Right. You would have to be, right, given your topline guidance raise today. So what is the risk there? Is your conviction very high that we're kind of going to stay flat or improve, or in terms of just the footwear industry as a whole, given the fact that you have to factor in that you are seeing the product cost increase?

Yes, I can give you my personal view, and of course my economic degree isn't that current. But from a macro point of view, we think there is going to be a slow recovery. We do not expect a double-dip, but we think the recovery is going to be a little choppy at times, and we've witnessed that over the last four weeks or six weeks.

But from a macro standpoint, we think we are in a recovery, certainly here in the United States, and even starting a little bit in Europe and some of our developed markets. A lot of the other 180 markets that we are in around the world are roaring back and are performing very nicely.

So again, from a macro standpoint, footwear is the leading category out of this environment, and our brands are outperforming our competitors, and we appear to be gaining market share.

Okay, thank you. I'll pass it on.

Jim Duffy, Stifel Nicolaus.

Thank you. Good morning. A couple questions on the input costs. You mentioned a mid-single-digit increase in input costs. What would you expect the change in ASPs over the balance of the portfolio to be in the second half of the year?

We think they will be increasing. They will be up.

But I would say on average, Jim, less than the mid-single-digit increase in the product cost.

Okay. And what are you seeing in terms of pricing moves from competitors? Are you getting any feedback from accounts on that? Is that something where you are seeing everyone in the categories try to pass along the cost?

Yes, I think we are entering a time period here, given the footwear supply chain, where it is just going to become more complicated in more countries and a little more difficult. So we are hearing reports on a number of other brands increasing prices, both here and in Europe. And we think that is going to happen.

Fundamentally, over the next short-term and mid-term, the next two or three years, we see footwear pricing, and then footwear at retail prices increasing, around the world.

Okay. That makes a lot of sense. So as you look out to 2011, given some of the input cost increases, should we, as analysts, be thinking about a different algorithm for earnings growth for you? Or do you think that you can use pricing and some of these other levers that you've mentioned to maintain gross margins or see improvement again in 2011?

Certainly, if you look at our year-to-date earnings growth, I wouldn't use that as the algorithm for 2011. But certainly across the 12 brands in our portfolio, there are a lot of levers that we can pull to partially offset, or offset, the high-single-digit product cost increases we think we are looking at. Certainly the first line of offense is taking our own selling prices up. And we don't have complete visibility of what the competition is doing for Spring 2011, but based on what we've heard, I think price increases are going to be utilized as a tool by everyone in the space.

So that, along with the continuation of reallocating our investment behind the higher gross margin brands which results in a positive mix shift, there will be a very modest year-over-year benefit in 2011 to our restructuring programs, as we completed the consolidation of our domestic manufacturing into one facility this year. Freight costs are a big wild card; although a small part of overall cost of sales, the significant percentage decrease we saw last year and now increase this year can certainly have an impact on our margin. So we are looking at every available tool in the toolbox to try to offset the impact of the higher product costs.

Okay. It would be a reasonable thought process to think you could hold gross margins flat in 2011?

We are not offering any guidance yet for 2011, but we will say we are going to use every tool available to us.

Okay. And on that topic, one of the levers for you, which is favorable from a mix standpoint, is the outgrowth in direct to consumer. It seems like you have been very pleased with the results there. Can you provide kind of an update on your strategic thoughts of how that fits into the portfolio?

Yes, right now Jim, as you know, on a reported revenue basis, only about 7% of our top line is consumer direct. We have plans in-house in the midterm to double that. We need to get that to at least 15%.

That being said, though, our global points of dedicated distribution are substantially larger, almost 6000. Most of our distributors, frankly, are retailers, first and foremost, and wholesalers second, especially with some key markets. And so they continue to drive a very good expansion of dedicated points of distribution.

Over the last six years or so, we've had well over a 20% annual increase in our dedicated points of distribution around the world. And our e-commerce business this last quarter and year-to-date is up exceptionally strong double digits.

As we talk about positive mix shift, I'll include the consumer direct business in that equation. You're right, with consumer direct up -- I think it was 16% or 17% in Q2 -- much more than the overall revenue growth rate, that certainly has a positive impact on consolidated gross margin, and that should continue in 2011.

Okay, great. Nice quarter. Thanks a lot.

(Operator Instructions) Mitch Kummetz, Robert W. Baird.

Thank you. Not to beat a dead horse here, but on the cost side, Don, I think you said it was a mid-single-digit increase in the back half. Is that what you were expecting?

Yes.

And then the visibility that you have into next year -- and I know you don't really want to give numbers for next year -- but that gets worse into the first half. Do you have pretty good visibility on the cost side into the first half of next year?

We do, we do, and we are comfortable saying high-single-digit increases next year, certainly through the first half, with more work to be done on the second half. But certainly we are looking at high-single-digit cost increases in the first half of next year.

I'm just not comfortable yet sharing, Mitch, a gross margin for all of 2011. It would just be a little too preliminary for that.

I understand. And on the FX side, you did mention that in the back half, or maybe it was the second quarter, you expect a little bit of pressure from FX on your hedging. When is that at its worst?

As it relates to the hedging, the purchasing of forward contracts, that actually was a negative in the first half of the year. That will actually be a positive in the second half of the year, based on our current FX assumptions, more than offset by negative translation on revenue.

Okay. And given what you are doing with hedges today going into next year, how do you see that playing out, at least into the first half of next year? Does that become a negative again in the first half?

Nowhere near as significant a negative as it was in the first half of this year, so a little bit less of a negative.

Okay, that's helpful. And then on the backlog, Blake, you mentioned it was up over 38%. Could you give us a little color as to how that might compare by business groups? I would assume they are all up, but is one or another up more than the others, or how should we think about that?

Well, we usually don't give that kind of detail by business unit. I'll just say that all of our business groups had strong double-digit backlog increases.

Okay.

As you know, backlog has never been a precise formula, or indicator of future sales. But certainly it is very relevant, and we think it is indicative of the positive trend that we have right now in our business.

Okay, that's good. And maybe let me ask a question in a different way. On the sales guidance for the year, I think you said you are looking at like 8% to 13% growth in the back half. Should we assume that all the groups are up in the back half?

I don't have a photographic memory, but my recollection is that they are all showing some form of growth in the second half. Obviously some stronger than others.

Okay. Should we think that Outdoors probably leading that growth?

I won't comment further than that.

Okay. A few other items real quickly. The delayed shipment in the second quarter you mentioned was Merrell and CAT. Could you say how big the impact was on sales in the quarter and how that might have split between the two businesses?

It was about $4.5 million, probably --

Two-thirds Merrell, one-third CAT.

Right. Blended more towards Merrell.

Okay, that's helpful. Thanks. And then on the SG&A, do you still expect your SG&A to continue to trend higher into the back half of the year, but maybe not growing as quickly as sales?

I would not expect it to grow as quickly as sales, no. You are correct on that. And we are going to see lower year-over-year restructuring benefits in the second half of the year, while we continue the increases in our brand-building investments. So I think you will see the full-year mid-single-digit increase that we talked about.

Okay, and then last question. What were the year-over-year increases in both direct to consumer and international for the second quarter? It sounds like they were both up. Or, I'm sorry -- the direct to consumer was up big. Don, I think you said it was what -- 16% to 17% of sales in Q2?

(multiple speakers)

So how much was it up year-over-year? And what was international, can you say?

I'm sorry -- the consumer direct was up -- in the Q2 was up to 16.8% year-over-year.

Okay, 16.8%. That is what it was up, or that is what it was as a percentage of sales?

That was the growth.

Oh, that was the growth. Okay, all right. Again, I misunderstood you then. And then what about international?

International, like non-US revenue?

Yes, non-US.

Just excluding Canada and Europe, high single digits.

Okay, all right. Great. Thanks, guys. Good luck.

Sam Poser, Sterne, Agee.

Good morning. Most of my questions have been answered. But the Hush Puppies business, which was down, is that going to be one of the larger growth areas in the back half of the year, given the introduction of and the response to the 1958 collections?

Sam, those collections are just being introduced. It's kind of hard to gauge the magnitude right now. We certainly have plans to grow the Hush Puppies business in the second half. And there are a lot of product initiatives. A couple of the big ones, of course, are the body shoe and then the 1958 collection, which taps right into the Americana and classic American casuals trend.

Okay. And then with this 38% increase in the backlog, are we looking at double-digit increases across the board? Can we comfortably say that, at different levels?

The growth would probably be high single digits for maybe some of the underperformers and up to double digits.

But the story behind the backlog at plus 38% and the revenue guidance that we are giving and what that forces out for the second half, that is a similar story to the end of Q1, Sam, that we have all talked about at length. It has to do with the timing of orders coming in this year versus last year.

And quite frankly, at the end of Q1, as I know you and I discussed, we would've expected the backlog to trend down between end of Q1 and end of Q2; and it didn't. It actually went up a little bit. But there is still very much that same story, which is timing of orders, both driven by increased confidence on the retail customers' part for the back half of the year, as well as continuing concerns regarding factory capacity and availability, and our encouraging our customers to get orders in early. And I have come across numerous more examples during the second quarter of our sales team telling me, if I look at weekly orders and ask questions about those, and the sales team responding, yes, these are orders that were placed in the 10th period last year and are coming into our backlog in the fifth or sixth period this year. So that trend has continued.

And how much of that do you put towards the environment versus an improvement in the performance of the product compared to competitors' performance with product?

Yes, I would say, Sam, that, first of all, Don is right. A portion of the orders that are in our backlog today, in a normal year they might be at-once orders. They've been converted into future orders because of some of the supply chain issues and our close work with our key retail customers. But it is only a portion. Obviously, our spectacular order backlog position is being driven by creative and innovative product and market-right advertising and marketing for our brands.

Thank you very much, and continued success.

Jeff Blaeser, Morgan Joseph.

Good morning. Thanks for taking my question. You mentioned a lot of initiatives to offset some of the projected higher costs. Are those both in the guidance or are they potential upside margin generators if successful?

No, they are built into the guidance.

Okay. And could you touch on the just-in-time order flow in the second quarter? Was that in line with expectations, better, or any kind of trend you can see going forward?

I think we were ahead of the curve in our planning, and so -- are you talking about incoming orders?

At-once orders, yes.

At-once orders, okay.

At-once orders were up, but they were up just low single digits in my recollection. A much higher increase in incoming orders being future orders.

Yes, the story in the second quarter, Jeff, was really consistent with the first quarter, which is much lower growth in our at-once business, but more than offset by incredibly strong growth in our futures orders. And orders that came in last year in the form of at-once orders are being placed earlier, and therefore, they were classified as future orders based on how we define the two.

One of the issues coming into play is last year, across our industry and certainly within our own Company, we had a much higher percentage of closeout sales. Those would have all been categorized last year primarily as at-once orders. So we are going against, in the at-once category, unusually large numbers from last year, which was a pretty unusual year.

Okay. And then, obviously, excellent job on the inventory side; down year-over-year despite the sales. Do you think that is sustainable, or is it a little bit of timing and maybe --?

It is a little bit of timing in the sense that last year we were still working off very high year-end 2008 inventory levels. I will say that given the momentum in our business and our initial outlook for the first part of 2011, we would clearly expect inventories to be higher at the end of 2010 than the very, very low level at the end of 2009. Our days sales of inventory at the end of 2009 was incredibly low, given recent history. And so if we come back to a more normalized DSI at the end of 2010, we are looking at a year-over-year increase in inventory, the exact magnitude of which isn't yet determined.

Great. Thank you very much.

(Operator Instructions) Jonathan Grassi, Longbow Research.

Good morning, guys. Just a couple questions. You said the $3 million to $4 million in incremental SG&A was coming from increased marketing spend and increase in the sales force. How much of that is being directed towards Merrell? Could you give us some color on like where it is being spent?

Yes, for the first half of the incremental spend, about two-thirds of it was behind the Merrell brand, and then one-third behind the other identified -- specifically identified key growth initiatives, such as Sebago, Chaco and Cushe. So Merrell is the biggest recipient of the incremental brand-building investment.

Okay, great. And then just shifting over to the industrial boot category, to Caterpillar and Wolverine. It sounded like you said there was a lot of at-once orders that occurred for those two products line in the quarter. Should we expect that backlog for those two product lines are probably maybe at the lower end of the range then going into the second half?

Both of those brands have very, very healthy backlogs. You are right that our boot brands probably had the highest year-to-date at-once order intake. But still, their backlogs for the Wolverine brand, driven by the 1000-Mile Boot program, the 1883 Boot program, ICS and Caterpillar [by] Flexion and some other new product introductions, their backlog is up by a very healthy margin.

Okay, great. Thank you.

Scott Krasik, BB&T.

Don, a lot of moving parts in the cost of goods line. If I tried to isolate what the biggest parts are that are going up -- wage inflation, transportation, maybe material -- what percentage of your cost of goods would that equate to?

What percentage of those components, you are talking about?

Yes.

Materials is about 55% to 60% of total laid-in cost, landed standard cost. Labor is about 10%. Factory overhead and profit is another 10%. Duties are about 7%. Freight is about 3% or 4%.

And then there are other things that I'm not sure -- I probably give you numbers that add up to more than 100% -- if I did, I didn't mean to, but that is the general magnitude.

(Multiple speakers) What's affecting us this year is everybody at the beginning of the year expected the passage of the Miscellaneous Tariff Bill. The failure to pass that and experiencing some of the reduced duty rates that we've had for the past three years is certainly also having an impact on our overall product input costs.

That has not yet been extended, although a committee in the House has posted the bill recently, and our best information is that any consideration to that Miscellaneous Tariff Bill would occur after the November election. So that particularly impacts our Merrell brand and its duties.

Then just in terms of the material, since that has been going up for -- I don't know -- nine months now, is that something that you sort of could buy for ahead of time and avoid? Could the product cost increase have been worse or are you feeling the pain of higher materials as well?

We leave a lot of that to our factories. We don't hedge key components for our contract factories, to be honest with you. They have their individual strategies, and we usually are negotiating a season or two in advance on prices. So that is all factored into our expected prices.

This year, the Miscellaneous Tariff Bill, higher freight costs, oil has spiked back up, there has been some unexpected pricing pressure.

Okay. And then any part of your business where you find taking price to retailers more difficult than others that you would call out?

I guess it is never easy, and most of the price increases we've implemented to date have been with some of our boot brands and some select other price increases.

But not really. I mean, even in our core work business in the Wolverine brand, the customers in the US view that as a tool for them. They pay for quality tools. They expect their tools to be the best, and that is what Wolverine footwear is. So, knock on wood, to date, we haven't had a lot of pushback.

Okay, good. And then this probably you won't answer satisfactorily, but you've talked about looking at acquisitions. Your competitors certainly have as well. People are well-capitalized. There is private equity money looking to go to work.

What would you put the odds at actually finding something and being able to pay a disciplined sort of multiple, for something that could move the needle? Is it pretty low at this point?

Well, let's just say that we have a very unique business model, and we execute well against it. So when we buy a business, we acquire a new brand, we plug and play it very, very well. Our global distribution network is a key competitive advantage for the Company. We also have established acquisition criteria.

So we have plenty of financial resources. We generated excellent cash last year and again this year. And so we are out actively looking against a disciplined and well established criteria. And when we find the right fit, something will happen.

Certainly in our current portfolio, if you look at Merrell Apparel and Cushe and Chaco and even Sebago, we've got a number of initiatives that are already -- we are devoting resources to that are going to have accelerated growth.

I'm going to take that to mean there is nothing imminent.

Well, if something was imminent, we wouldn't tell you anyway. But the odds are very low that we are looking aggressively. The odds are a little bit higher than that we are going to announce something between now and the end of the year, but we are looking aggressively.

Okay. Thanks, guys. Good luck.

We don't want to overpay, though, obviously.

Obviously. Take care.

Sam Poser, Sterne, Agee.

I just have one more question about the gross margin. You walked through the negatives and the positives, but what assumptions are there to make the negatives overwhelm the positives to the degree that it looks like they are going to in the back half of the year?

Well, the mid-single-digit product cost increases and the higher freight costs, which are not really assumptions; they are contractual. And since we negotiated our new freight contract effective with a May 1 year for the freight carriers, there has been a peak season surcharge imposed on companies much larger than us and it has filtered down to affect Wolverine as well.

The lack of extension of the Miscellaneous Tariff Bill, which is a several million dollar impact on our Merrell brand. Those are overwhelming the positives that we talked about.

And are you assuming any change in sort of the -- in the merchandise margin?

The actual margin?

Are you putting in the same kind of clean inventory levels, the same kind of expectation, that there is not going to be a lot of closeouts? Are those in your guidance, or are you on a more normalized --

Yes, I mentioned significantly lower closeouts in the second half of the year, which is a margin benefit. But the negatives that I talked about -- including, don't forget, Sam, the LIFO that I talked about in the prepared remarks, that negative $2.6 million year-over-year swing, which is a Q4 issue, that is a fairly big driver to the negative margin in the back half of the year.

Okay. Thanks very much. Good luck again.

Ladies and gentlemen, at this time I am showing no additional questions. We would like to turn the conference back over to Ms. Cowdin for any final remarks.

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 Thursday, July 29, 2010.

Thank you and good day.