Wolverine World Wide Inc (WWW) 2010 Q3 法說會逐字稿

Good morning and welcome to Wolverine World Wide's third-quarter 2010 earnings conference call. All participants will be in a listen-only mode until the question-and-answer session of the conference call. (Operator Instructions). This call is being recorded at the request of Wolverine World Wide. If anyone has any objections, you may disconnect at this time. I would now like to introduce Ms. Christi Cowdin, Director of Investor Relations and Communications for Wolverine World Wide. Ms. Cowdin, you may proceed.

Thank you, Amy. Good morning, everyone and welcome to our third-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 third-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.

This morning's press release included non-GAAP disclosures and these disclosures were reconciled with attached tables within the body of the press release. Today's comments during the earnings call will include some additional non-GAAP disclosures. There is a posting at our corporate website that will reconcile these non-GAAP disclosures to GAAP. To view the document, please go to our corporate website, www.wolverineworldwide.com, click on Investors and 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 vs. Non-GAAP Disclosures.

Before I turn the call over to Blake Krueger to comment on our results, I would like to remind you that 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 all that being said, I would now like to turn the call over to Blake.

Thanks, Christi and good morning to everyone. This morning, we reported outstanding financial results for the third quarter, including record revenue and earnings per share. Our unique business model continues to serve us well as evidenced by three consecutive quarters of accelerated growth and record earnings.

Our powerful portfolio of brands continues to generate excitement and a high level of demand in the marketplace. Revenue growth in the quarter and on a year-to-date basis has been widespread across all brand groups and geographic regions, and our growth trends should accelerate into the fourth quarter based on our strong backlog position at the end of Q3.

The sell-through experience for our retail partners has also been exceptionally strong and our own consumer direct business, which includes both our brick-and-mortar stores and e-commerce operations, continues to outperform.

Our strong revenue growth in the quarter and record order backlog, up over 55%, is the result of great execution by our team, as well as several macro, consumer, fashion trends and the global scope of the economic recovery. The global appeal and reach of our brands, which now extends to over 190 countries, is benefiting from the accelerated economic recovery in most international markets. While some mature markets are growing at a slower pace, we are witnessing strong growth and accelerating consumer demand across a wide spectrum of countries.

There is also a sustained global trend in favor of authentic brands with a real heritage. American brands, especially those with a boot tradition or a close affinity to the outdoors, are benefiting from these global consumer preferences. All of these factors are contributing to our accelerated growth coming out of the tough economic cycle.

We are excited about the positive momentum in the business, which has allowed us to raise our 2010 guidance. The benefits from actions taken last year to better position the Company for accelerated growth, coupled with excellent execution by the team, will allow us to deliver exceptional results despite some lingering macroeconomic uncertainty.

Let me spend a few moments sharing some important highlights about the progress we are making with our key brands. I will start with the Hush Puppies Group. The Hush Puppies brand continues to drive global growth with a focus on its international licensing business and an expanded retail presence. The brand is having early success in key emerging markets. Two new concept stores and three major shop-in-shops were opened in India during Q3, helping to support the 60% year-to-date revenue growth Hush Puppies is experiencing in that significant market.

We also expanded Hush Puppies' global retail presence in established markets with additional concept store openings in the Philippines, Central America, Dubai and Egypt. Three new lifestyle stores, featuring footwear, apparel and accessories, were also opened in Indonesia. In addition, the brand's consumer direct business grew nearly 30% in the quarter.

We ended the quarter with a global store count of about 550 stand-alone Hush Puppies concept stores and over 1200 dedicated shop-in-shops. Global product innovation is also fueling growth for Hush Puppies. The Body Shoe concept, which boasts trend-right toning and comfort benefit, is gaining momentum and our vintage 1958 collection is generating strong retail sell-throughs.

Our classic Hush Puppies 1958 Airstream was used to promote the collection and recent events in Montreal, Atlanta, Chicago and New York City have been instrumental in building consumer awareness for the brand. Hush Puppies is capitalizing on the strong vintage Americana consumer trend. Hush Puppies continues to be one of our most successful global non-athletic footwear brand.

Focusing on Cushe, positive momentum continues for our action sports lifestyle brand that targets younger consumers. Cushe added over 150 new independent retailers in the US during the quarter. Important US customers, including Nordstrom, are experiencing strong sell-through on signature Cushe style. The brand is now available in 55 markets worldwide and our second Cushe concept store was recently opened in the Philippines. The Cushe brand is simply winning with spectacular cutting-edge product. We continue to expect significant growth from this business going forward.

Let's now turn to the Heritage Brands Group, which includes Sebago, as well as our two largest licensed footwear businesses, Caterpillar and Harley-Davidson.

Sebago continues to benefit from the global trend towards brands with authentic American heritage and craftsmanship with the brand posting strong double-digit growth in the quarter. The Sebago team is expanding brand awareness through innovative industry collaborations and social media connections with consumers. These efforts have led to new trend-setting product design and have opened more premium channels of distribution.

During Q3, Sebago launched the Nexus project, which features designs from five of today's top lifestyle bloggers. The Nexus project has generated over 5 million global media impressions and has created instant demand for the new products, which disappeared within hours of hitting retailers' shelves.

The Sebago brand continues to gain importance with influential US retailers. During the quarter, initial product launches took place at Urban Outfitters, Nordstrom and Saks Fifth Avenue. Retail performance has exceeded expectations and these programs have been expanded to new doors for the upcoming Spring season. In addition, Saks Fifth Avenue selected Sebago to be featured in its window campaign for the Saks Fifth Avenue Fashion's Night Out event during New York's Fashion Week. This was a great success.

Turning to Cat footwear, our efforts to increase premium distribution continue to pay dividends as we open better grade retailers around the world, including Kurt Geiger and Jones Bootmaker in the UK and The Tannery in the US. Our innovative lifestyle products are performing well at retail and we are encouraged by customers reporting strong sell-through of our new collection.

The Cat brand experienced very strong growth with our international distributor partners in the quarter, driven primarily by new lifestyle product offerings. The brand is also expanding its international retail initiatives after positive reaction to new concept stores in Peru and China. We continue to drive consumer direct connections through our shop-in-shop program and e-commerce efforts.

Finally Harley-Davidson Footwear posted solid increases in each of its largest markets during the quarter. The brand continues to deliver trend-right product to the loyal Harley-Davidson consumer. The Harley backlog is up significantly and we remain excited about our future prospects for the brand as the motorcycle market continues to improve.

Now let's turn to the Wolverine Footwear Group, which includes Bates, HYTEST and the Wolverine brand.

The Wolverine brand had an exceptional quarter and is experiencing phenomenal success based on the continued dominance in the core work category, coupled with great break-through performance product in the Rugged Casual arena. The brand's top core work customers have achieved strong double-digit growth so far this year, driven by the brand's innovative Contour Welt technology.

Wolverine's authentic brand positioning and product innovation in the form of the 1000 Mile Boot, 1883 and ICS programs have driven a very large backlog position in the Rugged Casual category and we've place this product in premium distribution channels.

The Apparel program is an important component for extending Wolverine to a lifestyle brand and has been very well received by existing footwear customers. While still a small, US-centric business, the Apparel program will experience significant growth in 2010 and is benefiting from a triple digit backlog increase for Spring 2011.

Turning to Bates. This business is committed to being the leading provider of footwear solutions for all branches of the US military and the global civilian uniform market. The brand's product innovation capabilities continue to drive recent growth and market share penetration. Bates was notified during the third quarter that it will be the prime manufacturer for 105,000 pairs of the Hot Weather All-Terrain Boot for the Marines to be shipped in Q4 of this year and Q1 2011. In addition, the continued success of our Bates ICS technology and the recently launched C3 program have helped to fuel solid growth in the civilian uniform sector.

Turning to the Outdoor Group, which includes Merrell, Patagonia Footwear, and Chaco brands, this is our company's largest operating group in terms of both revenue and profit and is on pace for another record year. Merrell's Outdoor Performance category, which we refer to as "Outventure", continues to generate excellent growth and new product offerings have solidified the brand's position as the leader in the Performance Outdoor segment.

This category is being fueled by updates to core programs and the introduction of a new women's program, the Avian, an extremely lightweight and versatile product built for both on and off the trail.

Building on its leadership position, Merrell has partnered with Vibram to introduce its new Barefoot collection for the Spring 2011 season. The initial product launch has exceeded our expectations and Merrell has some great fresh product under development. We expect Merrell to quickly develop into the go-to brand for this category as it expands this category to mainstream consumers.

Merrell has already received significant retailer commitments for its Spring Barefoot collection, which will be supported with dedicated point-of-purchase programs, social media and marketing initiatives. The Spring introduction will be followed by a broader, more versatile Fall 2011 collection that will include new materials and leathers. The Barefoot program is a prime example of the Company's commitment to product innovation and is an exciting growth opportunity for the Merrell business.

Growth at Merrell's Fusion, the Outdoor Casual collection, was driven by the new men's World collection, the new women's Tetra boot offering and the expansion of the highly successful Encore shoe collection for Fall. The Merrell team continues to focus its marketing and advertising strategies on increasing consumer brand awareness and these efforts are proving successful.

NPD recently reported that overall brand recognition in the women's category had improved by a third from 2008 to 2009 and Leisure Trends reported overall Merrell footwear sell-through at retail was up 18% for the year.

Merrell apparel is generating strong early sell-through for Fall on the heels of a solid Spring 2010 season. Retailer confidence in the brand is translated into strong Fall 2010 sell-in and a double-digit order backlog increase for Spring 2011.

A growing number of retailers have enthusiastically responded to Merrell's versatile styles and improved technology, including the Merrell Sleep Stuff innovation that converts a garment into a neck pillow for traveling, camping or relaxing on the go.

The Merrell apparel program is an important component of the brand's future growth plans and has helped the brand accelerate the opening of Merrell Lifestyle stores around the world. Merrell ended the quarter with 128 branded stores and nearly 950 dedicated shop-in-shops. During the quarter, five new outlet stores were added in the US, as well as concept stores in Mexico and Panama.

We continue to make investments in our Merrell consumer direct business and this investment is being rewarded with outstanding comp store increases in our brick-and-mortar fleet and strong double-digit growth from our Merrell e-commerce business. The Merrell consumer direct business was up over 30% in the quarter, further reflecting the core strength of the brand.

Turning to Patagonia, our footwear offering is growing market share in all categories and is experiencing strong sell-through at retail. The Patagonia brand continues to experience incredibly positive public relations exposure in the mainstream marketplace, fueled in part by Yvon Chouinard, the founder of the brand, being featured in recent American Express commercials. These ads and the brand's attributes resonate with many different consumer groups.

The new initiatives in Patagonia's product line, such as the trail running Tsali and the eco-friendly P26, the technical hiking collection, are gaining marketshare in the outdoor specialty channel. The Advocate program, launched this Fall, has been a big success by promoting local grassroots environmental organizations and enhancing awareness of the brand's core values.

Turning to Chaco, our pure outdoor adventure brand, this brand continues to experience accelerated growth with much of the recent success attributable to the Fall 2010 launch of closed toe product. Many retailers are looking to expand their Chaco business, especially with the availability of a year-round product offering, as well as the enhanced product and customer service support the brand is now enjoying under the leadership of the Outdoor Group.

Shortly after acquiring Chaco, we identified pent-up demand for the brand in the US, which is underscored by the phenomenal recent acceleration of Chaco's online business, which quickly tripled and is now the Company's number two branded e-commerce site, behind only Merrell. We expect Chaco to be an important growth driver for the Company in the future.

In summary, we are very pleased with our record earnings performance so far this year and believe that our growth momentum will continue into the future. History suggests that footwear tends to outperform many other consumer categories during a post-recession recovery and we are certainly experiencing this for our brands on a global basis.

Our brands and products are currently in high demand as illustrated by an all-time order backlog increase at the end of the quarter, up over 55%. While part of this increase is attributable to early order placement by key customers attempting to combat longer product lead times, the vast majority of the order book increase reflects the success of our innovative product and marketing initiatives, enhanced consumer connections and greater customer service support. We're simply delivering what our customers and consumers need and they are asking for more.

We expect that the industry-wide supply chain challenges that have negatively impacted capacity and input costs will begin to have some effect on our results in Q4. While we anticipate some upward cost pressure into 2011, we believe we have the visibility, scale, pricing flexibility and overall ability to manage through these challenges.

I am extremely proud of the Wolverine team for the continued progress we are making on key growth initiatives and the ongoing execution of our business model.

I will now turn the call over to Don Grimes, our CFO and Senior Vice President, who will provide you with some additional details regarding our Q3 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 another outstanding quarter of financial results with record revenue, record operating margin and our third consecutive quarter of record earnings per share.

Additionally, we continue to manage our balance sheet in a disciplined fashion, helping drive our trailing 12 months return on average invested capital, adjusted for restructuring charges, to a record 21.3%. I am very gratefully referring quite a bit to record performance - performance that, while partially reflecting the economic recovery in many of our most significant markets, is a significant testament to both the strength and consumer relevance of our brand portfolio and the abilities of our talented employees to execute on well-developed plans for growth.

Taking a closer look at the third quarter's results, reported revenue for the quarter was $320.4 million, representing excellent growth of 11.7% versus the prior year. As expected, FX was a drag in the quarter, reducing reported revenue by $3.1 million, or 1.1%, as a stronger US dollar versus both the British pound and euro more than offset a stronger Canadian dollar.

Last quarter, we discussed in both our prepared remarks and in the follow-up Q&A the challenging supply-chain environment facing the entire footwear industry, specifically price increases and constrained capacity resulting in longer lead times. Our results in the quarter were negatively impacted by factory delays for a few brands in the portfolio and our past-due backlog at quarter end was higher than the prior year. Fortunately, most of these orders will slide into and benefit the fourth quarter.

The drag on the quarter's revenue performance represented by these factory delays was only partially offset by the benefit from a shipment of Merrell and Caterpillar product to a third-party distributor that slipped from the second quarter into the third quarter, another issue that we discussed during last quarter's earnings call.

Our Outdoor Group, which consists of Merrell, Chaco and Patagonia Footwear, is off to an excellent start to the Fall season with Q3 revenue of $121.3 million, growth of 5.6% versus the prior year, and an even better double-digit increase in unit volume. A very strong beginning-of-quarter backlog was negatively impacted by the late arrival of certain incoming Fall products, moderate department store activity and lower closeout sales. We remain very bullish on the Outdoor Group in general and the Merrell brand in particular.

Our Q4 backlog for the group reflects very strong double-digit growth and the 2011 first-half backlog is up even more than that. We expect an acceleration of shipments over the balance of the fiscal year as the pace of incoming product improves, retailers take the balance of their Fall orders and cold weather and replenishment business kicks in.

Blake mentioned some of the outstanding sell-through metrics and improved brand awareness for Merrell. The latter being driven by our renewed focus on consumer advertising and marketing. We continue to have very high expectations for Merrell in the Outdoor Group.

Our Wolverine Footwear Group, consisting of our Wolverine brand, Bates and HYTEST, had another outstanding quarter with revenue of $65.4 million, 22.7% growth versus last year. The story is short, but sweet. Every brand and major geography in the Wolverine Footwear Group contributed to the group's revenue growth in the quarter.

Our Heritage Brands Group, consisting of Caterpillar Footwear, Harley-Davidson Footwear and Sebago, also had an excellent quarter with revenue of $63.5 million, a 14.8% increase over the prior year as the portfolio delivered strong growth in the US and Europe.

The Hush Puppies Group, which includes the Hush Puppies, Soft Style and Cushe brands, delivered mid-single-digit unit volume growth, but only a very slight increase in reported revenue to $36.6 million as a higher mix of third-party royalty business versus owned wholesale sales suppressed year-over-year dollar growth. Very nice growth in the US driven by initial sell-in of the new 1958 collection and impressive double-digit growth in key Asian markets were partially offset by the impact of factory delays and continued tough trading conditions for the brand in the UK and Canada.

Our other business units comprised of Wolverine Retail and Wolverine Leathers also performed well during the quarter with revenue increasing 27.3% to $30.5 million, driven by mid-single-digit comp store sales growth in the US, continued very strong double-digit growth in our e-commerce business and increased demands for Wolverine leathers from third-party customers. Our impressive revenue performance in the quarter was broad-based across the portfolio and reflected primarily on the outstanding product offerings we had for the key Fall season.

Recall that we announced last quarter that we had completed our strategic restructuring plan in Q2. Thus, all references to this year's Q3 results are as reported and references to prior year's numbers, unless otherwise noted, are adjusted for prior-year restructuring and related charges.

Gross margin for the quarter was 40.1%, almost equal to the prior year's adjusted gross margin. As expected, higher year-over-year product and freight costs were offset by a continued positive shift in channel mix and selected price increases.

Additionally, we had good news out of Washington, DC in August when Congress passed a new Miscellaneous Tariff Bill. The new bill is not nearly as favorable as the prior legislation, but it did help lower tariffs on certain types of footwear to levels below published rates. What we had thought was going to be a full-year negative impact of approximately $3 million has now been reduced by approximately $1 million. Thus, our Q3 gross margin was very slightly helped by a catch-up benefit of a few hundred thousand dollars related to the higher tariffs that were accrued in the first half of the year.

Operating expenses in the third quarter increased 9% to $80.7 million, or 25.2% of sales, compared to adjusted operating expenses of $74 million, or 25.8% of sales in the prior year. Consistent with the growth strategy that we have discussed for several quarters, the increase was driven by incremental investments in brand-building initiatives, specifically advertising spend designed to drive consumer awareness and investments in sales force infrastructure and the product development areas.

Our advertising spend was up about 24% in the quarter with most of the incremental investment behind Merrell, Cushe, Chaco and Sebago. By way of example, Merrell launched out-of-home advertising campaigns in the important markets of Seattle, Denver and Boston consisting of billboards in high-traffic areas and signage in, around and on public transportation areas and vehicles. These efforts are targeted at both maintaining the loyalty of the core Merrell consumer and expanding the brand's reach to consumers outside of its traditional target audience.

Consistent marketing investment that drives brand awareness is a critical part of our growth strategy. We're balancing these brand-building investments with continued discipline in all other parts of the business. Accordingly, general and administrative expenses were down more than 5% during the quarter. The flat gross margin and lower SG&A as a percent of sales helped drive a 16.1% increase in operating profit and a record 15% operating margin in the quarter.

In addition to being a record operating margin for the third quarter, it equals the Company's all-time record operating margin in any fiscal quarter. The effective tax rate for the quarter was 29% compared to 25.1% in the prior year. Last year's rate reflected cumulative year-to-date benefits of international tax planning strategies that weren't recorded until Q3. The current year tax rate does not reflect any extension of the research and development tax credit. We haven't given up hope, but the outlook for its extension in 2010 is murky at best.

Fully diluted weighted average shares outstanding in the quarter were 48.4 million, reflecting year-to-date repurchases of 1.8 million shares in the open market for $51.2 million, including about 159,000 shares repurchased in the third quarter for about $4 million. When you get to the bottom line, we are very pleased to announce that diluted earnings per share in the quarter grew to a record $0.70, growth of 12.9% versus prior-year adjusted earnings per share, representing the third consecutive quarter of record EPS performance. Our trailing 12 month adjusted EBITDA is now $161.9 million, representing a steady improvement in this important measure.

After four consecutive quarters of year-over-year inventory decreases, total inventories were up 13.3% to $208.5 million at the end of the third quarter. Our inventories are very clean and about one-fourth of the increase is attributable to lower inventory-related reserves with the balance of the increase affording the excellent outlook for our business in the fourth quarter and beyond.

Accounts receivable were up 6.7% on the 11.7% revenue increase and days sales outstanding were meaningfully lower than prior year. The Company's free cash flow remains extremely strong and we finished the quarter with cash and cash equivalents in excess of $95 million. Our plans for strategic uses of cash remain the same -- sustain and accelerate the growth of our existing brand portfolio, fund potential new acquisitions and share our cash flow with shareholders in the form of dividends and opportunistic share repurchases.

As Blake noted earlier, our order trends during the quarter remained very positive and our quarter-end backlog position was up substantially versus the prior year. We continue to see the positive impact to our backlog from a year-to-date shift favoring upfront orders versus at-once shipments. We remain very pleased with our backlog increase, but given the changing dynamic this year favoring earlier ordering, we don't expect actual growth in our wholesale business to mirror the current backlog increase.

With the exceptionally strong double-digit backlog increase and the Company's impressive performance through the first three quarters of the year, we are adjusting our full-year revenue guidance to a range of $1.2 billion to $1.22 billion, representing growth of 9% to 10.8% versus the prior year. We are also increasing our full-year earnings per share guidance to a range of $2.04 to $2.08 per share, excluding $0.06 per share of restructuring charges incurred in the first half of the year, representing excellent growth of 15.3% to 17.5% versus the prior year.

Key assumptions in the full-year earnings estimates are, one, full-year gross margin that is flat to slightly up with lower gross margin in Q4 driven by higher product costs, continued higher freight costs and a projected negative swing in our LIFO reserve of $2.6 million, or $0.04 per share; two, a negative year-over-year variance of $0.03 per share resulting from last year's abnormally low 24.2% effective tax rate, which was driven by the reversal of prior year's accruals versus our estimate for the current year of 29%; and three, full-year weighted average shares outstanding of 48.8 million.

To further expand on the Q4 EPS outlook, please note that we expect to continue the aggressive level of brand-building investments. Incremental investments in advertising and promotion in the fourth quarter versus the prior year will be in the range of $0.05 to $0.07 per share, but will help position our most important brands for success in 2011 and beyond. Thanks for your time this morning. I will now turn the call back over to Blake for some final comments.

Thanks, Don. We are obviously excited to have delivered another quarter of excellent financial results, which is the end result of a great team proactively leveraging a proven global business model. We are even more excited about the positive global momentum across our brand portfolio and our ability to deliver outstanding results for the remainder of 2010 and beyond. Thanks for your time this morning. We will now turn the call back to the operator so we can take your questions. Operator?

(Operator Instructions). Jim Duffy, Stifel Nicolaus.

This is actually [Stephen Gregory] of Mandalay Research, a couple of questions. Congratulations on a good quarter. Two months ago in The Wall Street Journal, there was an article regarding e-commerce saying, in 2011, companies are really going to be reshaping their e-commerce business as it's going to be a very critical year on the economy. I'm curious as to whether you -- if you could provide some color as to your e-commerce vision going forward for the company and how do you plan to get there?

Well, I mean we have been focusing on our e-commerce business for a number of years. Last year, we added some critical talent to lead that initiative and our results so far this year have been excellent. It has been a very busy 12 to 18 months for us in the e-commerce arena. We have revamped a number of websites. We have launched new websites here in the US and in Europe and frankly, our results are there. We are up a significant double-digit increase yet again this year over the prior year and I suspect we will be up next year as well.

Do you have a figure on percentage of total revenue that you guys are deriving from e-commerce?

Yes, it is not much at this point. It is a relatively small business, but it is a highly profitable business. We have a lot of the infrastructure in place to support it. We can ship and take single-payer return. We have warehouses, we have a great customer service team. We have the inventory. So in that regard, it is very important for us, not only from a financial standpoint, but also because of the consumers that are coming to the sites and getting what they want, when they want it.

In the next three years, what percentage of total revenue would you guys like to derive from e-commerce?

We are really not in a position to give a specific percentage at this point.

Given the current size, we would expect our e-commerce business to probably be one of the strongest growth drivers for the Company, growing at continued double-digit even for the next handful of years.

And right now, you guys are around 5% of total revenue?

In terms of our direct-to-consumer business, which includes our brick-and-mortar as well as e-commerce, we are at about 6.5% of the trailing 12 month revenue and we have a stated goal of driving our consumer direct business, including brick-and-mortar, to 15% of consolidated revenue.

And Don, regarding promotions, how are you guys able to drive promotions through either social media, through mobile, what have you, in a timeframe that allows you guys to react to consumer trends?

How are we able to do so?

Yes. How are you able to react? Obviously, it is a very fast-paced economy. How are you able to get to the customer before other competitors and provide the best value at the best price?

That is kind of a general question, but that is why we hire very smart marketing people who engage very smart agencies on the social media side in particular to make sure that we are responding very quickly to trends in the marketplace.

Kate McShane, Citi Investment Research.

Good morning.

Is this really Kate?

Yes, it is really Kate. I have two questions today. First, about the inventory buildup you saw during the quarter, it seems to be in line with what you expect revenues to be in the fourth quarter, but I was wondering if there were any issues since securing space on ships, and as a result, have you had to pull any inventory forward and carrying maybe a little bit more inventory than was planned?

I think we have been dealing with some of the supply chain challenges now for 12 or 18 months. They are frustrating for us. However, the report back from our retail customers indicates we are one of the best performing companies out there. So right now, I would say it is business as usual. We are not experiencing anything different than we have experienced the last six months in terms of factory capacity, our ability to get the shoes here, our ability to service our customers.

Obviously, our inventory is very, very clean and right now, we are chasing demand. Frankly, it is a great place to be in. If you have to have a challenge, that is a good challenge to have and it is one where the whole team is focused on right now.

Kate, when you think about our inventory position at the end of Q3 versus last year and then even our outlook for Q4 versus last year, as we drove towards the end of the year last year, our day sales of inventory was really almost at a historic low and our DSIs today are more consistent with what trends had been prior to 2009. So you may see an increase in inventory at year-end versus last year, but our inventories at year-end in 2009 were very, very low.

Okay, great. And then I know this is always a question on your conference calls, but your implied outlook for the fourth quarter seems very conservative, especially given how positive you are on backlog and just how positive you sound about the business in general, about chasing demand, etc. And I know you have stated in the past that you can't extrapolate the backlogs to the future revenue opportunity, but why hasn't the magnitude of the guidance change in the top line bigger?

Well, the top end of our revenue guidance forces out 14% revenue growth in the fourth quarter. So I don't think that is particularly mousy given year-to-date trends, and a mid-teen revenue increase is pretty strong across a portfolio of 12 brands. Certainly we have been comparing actual revenue growth this year to a beginning-of-quarter backlog that is substantially higher and we have noted in every quarter's earnings call the ships and timing this year more towards futures orders versus the prior year.

And as we discussed several times, not only is there a timing shift towards favoring early ordering this year versus normal periods, we are comparing ourselves this year to a time period last year in which orders came in much later. So that is contributing to the very strong year-over-year backlog.

We do think a substantial portion of the backlog reflects the attractiveness of our offerings to retailers and consumers and we feel very confident about the prospects for our business, not only in Q4, but going into the first half of next year.

Okay, great. Thank you.

Mitch Kummetz, Robert Baird.

Thank you. A few questions. First, Don, on the delays that you mentioned in the third quarter, can you tell us what the dollar impact was on sales and which brands were affected by that? Was that specifically the Outdoor business?

Across all the brands, the Outdoor Group and Merrell was probably most impacted by the past-due backlog. I will say, Mitch, that we have a past-due backlog at the end of every quarter, at the end of every week and we spend a lot of time, in this environment, analyzing the causes for the past-due backlog in the range of something as mundane as a credit hold, to inventory fill rates not being achieved, to inventory just not getting produced by the third-party factory in time and shipped to the customer or shipped to our warehouses. But the past-due backlog was higher by about $9 million year-over-year. We do think most of that will slide into the fourth quarter and benefit the fourth quarter. And to the latter part of your question, yes, the Outdoor Group and Merrell was probably the most impacted by that past-due backlog.

Okay. And then you also mentioned that, on the Outdoor piece, that there were fewer closeouts than last year which may be artificially deflated your sales growth in the quarter. Are you also bumping up against that into Q4 as well where you had a lot of closeouts in the business last year? I don't recall.

That won't be a big driver in Q4 revenue performance, no.

Okay. And then on your gross margin outlook, let me start with the year. You are saying flat to up slightly. I think last quarter, if I'm not mistaken, you said flat. I am just wondering what has changed? Your gross margin came in better for the quarter than what I was expecting. I am just wondering what you saw either in the quarter in your outlook or -- I don't know how much of this relates to this new tariff bill, but is there anything that has changed in terms of how you are thinking about gross margin for the balance of the year?

In any quarter, and as evidenced by what happened in the third quarter, channel mix shift can have a significant impact on our weighted-average gross margin. We saw stronger growth in our international markets, which, as you know, the royalty business has some very, very high margin and we have a different outlook on mix for the balance of the year. And to your point, the miscellaneous tariff bill being passed is having a modest benefit on Q4 gross margin.

Okay. And then thinking about gross margin going into next year, I think on your last call, you talked about a high single digit negative impact from higher input costs. Has anything changed there? Do you have any better visibility on that?

We certainly firmed up our outlook for product costs for the Spring season and it can range. Some carryover product will have flat costs year over year. Unfortunately - not enough of those, and some will have cost increases in the high single digits. But across the portfolio on a weighted average basis for the Spring season, we're looking at mid-single-digit cost increases out of third-party factories and we are still working through some of the details for Fall 2011 product costs. But certainly the outlook for the first half of the year would be mid single digits.

And it goes without saying that one of our initial responses to that type of cost increase will be looking at our selling price -- increasing our sales to offset that and we have quite a bit of experience as a company at navigating our way through challenging supply-chain environments, so we feel increasingly confident about our ability to manage through that.

Okay, that's helpful. And then on the SG&A outlook for the balance of this year, I think on your last call, again, you said up mid single digits in dollars for the year. Is that still in the ballpark?

Yes.

Okay. And then, lastly, on the backlog, both you and Blake made some references to the Spring backlog for certain aspects of your business. Can you talk a little bit about Spring orders? And Don, I thought you said that Spring was coming in better than Fall, although that may have been specific to the Outdoor piece.

Well, I think if you take a look at our backlog right now, we have got strong double-digit increases across all four brand groups with probably the highest groups being the Wolverine Footwear Group and the Outdoor Group.

When you look at the timing of our backlog, our Q4 is very, very strong and probably Q1 and Q2, on a percentage basis, are even a little stronger. Recognizing, of course, we certainly don't have all the orders in yet for Q2 and we're still expecting quite a few orders yet for Q1. But the early indications here are certainly good.

Okay, that's great. Thanks. Good luck.

Christopher Svezia, Susquehanna.

Good morning, everyone. Congratulations. I guess a backlog question, up 55%. How much of that would you quantify as just being the shift in at-once to futures and just people planning early, and how much is just, pat yourself on the back, due to Wolverine and your execution in what you are doing? Is it at 40% because it is early and 60% because of just the strength in the business? Can you maybe quantify that?

It is really hard to quantify it that precisely. I would say the shift from at-once to futures, my impression is that it wouldn't approach even 40% of our total backlog. That kind of shift has impacted some of our brands more than others. For example, I think the Merrell brand, because their customers have to make sure they have fresh product in their stores and excitement in their stores on a reason pace basis, I think they have seen a little bit more of a shift from futures to at-once. But other brands like the Wolverine brand, which is on fire right now and has been on fire all year, you would have less of an impact. So I would say the vast majority of our backlog is pat on the back, if that is what you want to term it.

Okay. But it seems like, in answering the last question, it seems like that growth rate has accelerated at least as you look to early Spring shipments in terms of percentage growth rate. Is that correct?

Yes, I would say it surprised us a little bit. We frankly thought we would be seeing a downtick -- because of the shift from at-once to futures, we thought we would be seeing a downtick in our overall backlog and that would start to occur in the third quarter. And we saw pretty strong order performance right through the end of the quarter. So we have been pleasantly surprised there a little bit.

Without tipping our hat really to looking at next year, given the fact that everyone's doing more of a backlog or futures basis in terms of the revenue, and it seems like you are incremental accelerating here, could these growth rates, and if you imply maybe mid single digits or mid-teens growth in fourth quarter, that that growth rate might be sustainable into sort of early Spring? Is that fair? Is there anything to think that that would fall off?

Well, that is always the goal of the team here, but I am not sure I would take that kind of increases every quarter on quarter to the bank. But certainly that's our goal here is to satisfy our consumers and right now, we are chasing demand.

Okay. And on the gross margin, as you think about early Spring mid-single-digit pricing increases on the sourcing side or cost increases, and you are talking about, obviously increasing pricing, and I think in the past you have talked about how you might not get all that in terms of pricing. There are some areas where you might not. What are other levers I guess -- if you can talk about it -- that would help offset those increases, that you guys could pull. Maybe just talk about them in a little more detail.

Sure. As you know, we go into every year with plans to increase our overall gross margins and that is not going to change. When we look at the supply chain situation, there are many things we can do. We can move -- shift some production to countries with lower duty rates. We can reengineer certain products to fall into certain categories. We can bring on new factories, new specialized factories that are focused on either a form of construction or a particular styling.

So we are trying to pull all those levers from -- input costs cover lots of different things, not just product costs, but we are trying to lower and keep as level as possible the total input costs. Product costs are one significant component of that, but you have freight costs and duties and in-country shipping and a number of things that impact that.

Chris, I also don't want to lose sight of the fact that we are looking to strategically allocate our incremental investment dollars. Not every dollar of revenue is equal. They have different gross margins associated with them either across our brand portfolio or across the various geographies. So when we look at how we -- when we think about our incremental investment dollars, we are really kind of going back to zero-based budgeting all of our investment dollars. We want to allocate those, but we are getting the highest return on those and so that generates positive channel and geographic mix that can have an impact on the consolidated gross margin, positive impact.

Okay. And the last question I have is just on Hush Puppies. You said it grew in the US in the quarter? I am just curious --.

I did say that.

Hush Puppies US had a very good Q3.

Okay. Should that accelerate at all as we go into Q4, just given the collections of product that you're putting into the marketplace and the response?

That is the hope.

Okay, all right. Congratulations, everyone.

Diana Katz, Lazard Capital Markets.

Hi, good morning and congratulations. To touch on international versus domestic growth in the quarter, what was your international sales penetration? And then can you also maybe talk more specifically about what you are seeing in Europe? And then you mentioned some tough trading conditions for Hush Puppies in Canada and UK, but perhaps overall what is the environment like in these countries and then what was the Forex drag on EPS in the quarter and where have you modeled it in 4Q?

Well, that is a lot of questions. I will take the first one maybe and hope Don can remember the others. If you look at our business geographically in the quarter, we had, as I indicated and as Don indicated, our international distributor and licensee business was simply excellent. We have seen broad-based recovery around the world, many countries, many regions. We are very fortunate with our business model to be in 190 plus countries around the world and that is serving us well right now.

Interestingly enough, the USA had a double-digit increase in the quarter. So we were very pleased with that and Canada also had a high single digit, mid to higher single-digit increase in the quarter and Europe was flat. So the news out of Europe, the news and the feedback we are getting, can change quite quickly depending on what is happening in Ireland or Greece or some other countries. But internationally, we expect continued strong growth into Q4 and beyond and we were very pleased in the quarter with our growth in the USA, especially given some of our product delays for some of our brands.

On the Hush Puppies, Diana, I mean more specifically in Canada and the UK, in the UK, in particular, Hush Puppies brand was impacted by the continuing consolidation among its primary retail customer base in that market as some bankruptcies have played out and there have been some retail stores taken off-line. So the brand continues to feel the impact of that. It is just a tougher trading environment for the Hush Puppies brand in the UK, which is really one of the biggest owned international markets for Wolverine World Wide.

Your last question had to do with foreign exchange assumptions. Our forecast for, consistent with past practice, the forecasted FX rates we are using are a little bit conservative versus current spot rates. We are using $1.50 on the pound, $1.25 on the euro and $0.95 on the Canadian dollar and those are the three currencies we have the most exposure to.

Great. Can you also talk specifically about some of the consumer fashion trends that you are benefiting from? Perhaps you can discuss the toning trends that are benefiting Hush Puppies' Body Shoe concept. Are you seeing any slowdown in the toning industry and then in regards to vintage Americana, what specifically is benefiting your portfolio?

Well, I think fundamentally we are a collection of brands, a portfolio of brands and people that have a passion for product. So we focus on product, product, product in everything we do. Coming out of this recessionary environment, there seems to be a strong consumer sentiment toward things that are real, things that have a heritage, things that are authentic. We are seeing it not just in the core Wolverine work business, but we are seeing it in the 1000 Mile Boot collection from Wolverine, priced in both key premium retailers at $250 to $350. We are seeing it in the 1883 collection. We are seeing it in the response to Sebago from better grade retailers. So that macro consumer focus on real authentic brands obviously plays well into our portfolio.

And when you look at Hush Puppies in particular, the 1958 collection, which is currently in all doors for Nordstrom, for example, and the Body Shoe, we are also having success with some of those trends in our Hush Puppies brand.

Okay.

I would call the Hush Puppies Body Shoe -- it is more than a toning shoe, it is not a rocker. If you have seen the product, it is not one of these rocker bottom offerings. It is much more sophisticated and has more technology than that. It also has substantially more eye appeal than some of those other styles. But we are having a great response, not only domestically here and in the UK, but also from our international partners.

Okay, great. Thank you very much.

(Operator Instructions). Jeff Blaeser, Morgan Joseph.

Good morning. Thanks for taking my question. You talked about the strong backlog growth and retail response and the fact that you are chasing demand. Does the industry-wide container shortage, limit potential 4Q sales as we go into the holiday season?

We really haven't seen, but you have to remember we have a pretty big pencil. So in the nonathletic footwear arena, we are certainly a big player and we are not shy about using that market power when we need it and we have needed it for some time here. So we haven't seen any significant impact on that.

The increase in the past-due backlog, Jeff, that we are talking about was driven more by factory delays and lack of container availability. Although, I will say that that one significant shipment at the end of Q2 that split into Q3, that was a container issue, but we don't anticipate that being a significant issue going forward for us.

So you think if the demand does continue to accelerate, you could get some containers and some product in for the holiday season?

We have been working hard to get additional capacity, not just for Q4, but for Q1 and Q2 and to make sure that our product flows smoothly.

And on the cost side, when we look at the investment spending, do you like look at top-line growth and recent strength when you pencil it in for a particular quarter or is it more of a longer term we are going to spend X in each quarter and deal with the SG&A as we go forward?

I think generally we take a longer-term view. We certainly took a longer-term view back in 2009 when we made the decision to protect the equity of our brand, not let our brands go promotional like many other brands did. We also made the decision back in 2009 and earlier this year to double-down on our product development investment and focus our efforts on product innovation and also to try and drive consumer awareness and demand.

And as one example, if you look at the Merrell brand still in the United States - a wonderful business, a large business. It still ranks number one or two on every survey on intent to repurchase and yet its brand awareness, although improving, is still relatively low. And that just highlights our need to put more time, effort and money behind driving consumer awareness and marketing initiatives for our brand.

And then finally, if I may, on the cost side in Q2, you mentioned that you expect overall costs to be up mid single digits, maybe 5%. Was that the case in Q3 or it sounds like it may be a little bit heavier weighted in Q4?

Actually product costs had over a 200 basis point negative impact on our gross margin in Q3 and fortunately we were able to offset that with a nice pricing flash mix benefit and then the fewer closeout sales also had a positive impact on gross margin. So product cost increases were about as we had forecasted for Q3.

Okay, great. Thank you very much.

There are no further questions at this time. I would now like to turn the call over to Ms. Christi Cowdin. Ms. Cowdin, you may proceed.

Thank you. On behalf of Wolverine World Wide, I would like to thank everyone for joining us today and as a reminder, our conference call replay is available on our website at www.wolverineworldwide.com. The replay will be available through Tuesday, October 19, 2010. Thank you and good day.