Wolverine World Wide Inc (WWW) 2011 Q1 法說會逐字稿

Good morning, and welcome to Wolverine World Wide's first quarter 2011 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. (Operator Instructions) 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, Andrew. Good morning, everyone, and welcome to our first quarter 2011 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 record results for our first quarter 2011. If you did not yet receive a copy of the press release, please call Abbey Brand 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'd like to remind you that the predictions and projections made in today's conference call regarding Wolverine World Wide and its operations may be considered forward-looking statements by security 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 everyone and thanks for joining us today. This morning we reported exceptional financial results for the first quarter. Momentum in the business that began in the back half of 2010 continued to build in Q1 and we closed the quarter with record performance against almost all financial measures including revenue, gross margin, operating margin, and earnings per share.

Every brand group in our portfolio posted revenue increases during the quarter, and all are poised for strong growth for the remainder of the year. We also delivered strong revenue growth in every global region. Our team's execution against our unique business model continues to deliver strong financial results for our shareholders. The first quarter was especially gratifying because we saw great performance from newer brands like Cushe and Chaco, new product categories like Merrell Barefoot as well as our core work, outdoor and casual product offerings.

Perhaps most impressive was our ability to deliver a slight increase in gross margin in Q1 despite the supply chain headwinds that still face the industry. We discussed our product cost mitigation strategies during last quarter's call and we continue to execute our plan to offset product cost increases. We remain confident in our ability to successfully manage through this turbulent supply chain environment. The team did a tremendous job executing in Q1 and I remain very optimistic about the remainder of 2011. Our brands continue to experience strong sell-throughs at retail and our backlog supports our aggressive growth objectives.

Now I'll spend a few moments talking about the performance of our brands starting with the Outdoor Group. The Outdoor Group, which includes Merrell, Chaco and Patagonia footwear, is the Company's largest revenue and earnings contributor and was the biggest source of revenue growth in Q1. Revenue for each brand grew over 20% during the quarter. Merrell continues to lead the way for the Outdoor Group and the Company, growing revenue at a strong double-digit pace in our wholesale, consumer direct and international businesses.

Merrell's retail footprint continued to expand and the brand now has over 1,000 dedicated shop-in-shops in 145 concept stores around the world. The Merrell Barefoot program launched in February has exceeded our initial expectations. Sell-throughs have been better than expected and we are seeing a significant amount of at-once orders as retailers try and keep up with strong consumer demand. Merrell has established itself as the go-to brand in the minimalist running category. And -- excuse me a second -- I guess Barefoot has me all choked up (laughter) -- and is expanding this program to mainstream consumers and additional product categories.

The successful spring launch of Barefoot will be followed with a broader, more versatile fall collection that will also feature new materials, colors and leathers. Merrell Barefoot is on track to be the most successful product launch in the history of the Company. In addition to Barefoot, I would also like to highlight the success of Merrell Apparel which delivered triple-digit revenue growth in the quarter. We continue to believe that a strong apparel program that complements our core footwear offering is crucial to building Merrell into a preeminent lifestyle brand. The apparel collection continues to perform well at existing retailers, and is delivering on its performance-meets-style promise to consumers. The Company will continue to invest heavily in Merrell as we look forward to Merrell becoming our first billion dollar brand.

Next, I'd like the to focus on the achievements of Chaco, the pure outdoor adventure brand we purchased a couple of years ago. We had a strong response from the fiercely loyal Chaco consumers to new product innovations including our closed toe program. Chaco is proving to be a winner for the Company and its shareholders and we believe this business will continue to grow at a very strong pace and will be a major contributor to our future performance. The Outdoor Group team did a phenomenal job during Q1 and the strong double-digit backlog increase at quarter end bodes well for the remainder of the year.

Next I'd like to talk about the Heritage Group which includes the Company's oldest brand, Wolverine, our two largest licensed footwear businesses, Caterpillar and Harley-Davidson, as well as HYTEST and Bates. This Group had an exceptionally strong Q1, finishing the quarter with a strong double-digit sales increase. Leading the way for the group were the Wolverine and Cat footwear brands. The Wolverine brand continues to perform well and grow market share in the core US work segment. Double-digit Q1 revenue growth in this segment was fueled by product innovation.

NPD and [Sports Gain] info data both show Wolverine is growing market share in core work faster than any of its competitors. In addition, the premium priced 1000 Mile and 1883 collections continue to be a major source of growth for the Wolverine brand both in the US and internationally. Consumers and retailers around the world continue to seek out this product which falls in the sweet spot of the current boot, Americana and authentic brand trends. Premium US specialty retailers like [Le Faux], Cockpit and Smith+Butler in New York City and the Tannery in Boston have had major success with the 1000 Mile collection. Plans were finalized in Q1 for the first 1000 Mile shop-in-shop with a prestigious independent retailer, On the Fly in San Francisco. Internationally, the popularity of the 1000 Mile and 1883 programs drove almost a triple-digit revenue increase for the quarter.

Turning to Cat Footwear. The brand had an exceptional quarter with all geographic regions posting strong revenue growth. Cat's industrial products, which feature proprietary anti-fatigue technologies, have helped drive the US business with the core work consumer. Globally, the brand continues to leverage its heritage to appeal to a broader set of consumers with lifestyle product which has been the driver of our international growth and success.

The Heritage Group had a great Q1 and the strong backlog increase versus last year leads us to be optimistic about the prospects for the remainder of 2011.

Let's now turn to the Lifestyle Group which includes Hush Puppies, Sebago, Soft Style, and the youngest consumer brand in our portfolio, Cushe. This group posted a low-single-digit sales increase in the quarter with gains in Cushe and Sebago offsetting a slight decrease in the Hush Puppies business. Cushe, our action sports inspired brand, led the way for the Lifestyle Group in Q1 and achieved outstanding global revenue growth. Cushe's growth has easily exceeded the expectations we had for the brand when we acquired it in 2009, as it continues to expand into new retailers including influential core independent action sports accounts.

Existing retailers are also increasing their investment in the Cushe brand. And a growing number of shop-in-shops are opening at key influencer accounts like the Tannery in Boston, City Soles in Chicago and Terra Firma in Montreal. Cushe also continues to expand its global reach. The Australia and Hong Kong markets were added in Q1, helping increase the total number of countries served to more than 85.

Sebago also performed well in Q1 and continues to gather global momentum. We are excited to showcase a full Lifestyle brand presentation in our first Company-owned Sebago store, which opened in Bath, England during Q1. While the store has been only opened a few weeks, consumer response has been very positive. Sebago ended the quarter with over 40 concept stores and 150 shop-in-shops around the world. Sebago's Artisan Collections also continue to create buzz in the marketplace, and have helped lead the placement at premium influencer retailers. In addition to expanded business with Saks and Bloomingdale's, Nordstrom and Urban Outfitters took Sebago to all doors in Q1. This strong retail and consumer response to these new programs and the exceptional backlog position provide a strong sense of optimism about Sebago's full year 2011 performance.

Turning to Hush Puppies. In Q1, our classic American casual brand turned in an excellent international performance, with strong double-digit revenue growth. Asia-Pacific was the strongest region, especially India and South Korea. The 1958 Collection continues to perform well at department stores and leading retailers in all global regions. In Q1, the collection launched successfully at The Bay, Canada's leading department store.

Better grade retail distribution is also being added in North America with the introduction of the Anna Sui Collection. Hush Puppies continues to be the largest brand, our largest brand in terms of global pairs sold and retail door count. The brand added 15 shop-in-shops and five concept stores globally and closed the quarter with close to 2,000 dedicated points of global distribution, almost 600 concept stores and around 1,400 shop-in-shops. The Lifestyle Group ended the quarter with the Company's strongest percentage backlog increase and we expect accelerated revenue growth in future quarters.

Next I'd like to give you a brief update regarding the progress of our new International Group, the formation of which was announced in January. Well, our existing network of international partners was and is one of the strongest in the industry, our new structure will allow us to bring even more focus to significant global opportunities, develop and implement specific regional growth strategies, and ensure that the full power of our brand portfolio is brought to market globally. Initially, the first priority of the new group is to place additional seasoned talent on the ground in key international markets to help drive accelerated growth.

During Q1, we achieved strong revenue growth in each region of the world, especially greater China, India, and other Asia-Pacific countries with the overall international distributor business growing at over 40%. We are very encouraged by our strong global momentum and expect the new International Group will enable us to consider new business structures and partnerships and expand our international leadership position.

I should also like to remind everyone that our International Group revenue and earnings results are still reported in the brand group results previously discussed. Excuse me a second. We're very pleased with our record Q1 performance but are even more excited about the momentum going into the remainder of 2011. We have set aggressive growth plans for our brands this year and are pleased by the execution seen during Q1. Our innovative product assortment, increased brand building investments and outstanding backlog position lead us to remain very optimistic about achieving the operational and strategic goals we set for the coming year.

As such, we are increasing our 2011 earnings and revenue guidance today. Don will discuss this in more detail during his comments. I just want to say thanks to everybody on the Wolverine team for making a record performance this quarter possible. It was simply a great achievement by the team. I'll now turn the call over to Don Grimes, our Senior Vice President and CFO, who will provide you with some additional information regarding our Q1 results and our outlook for the remainder of 2011. Don?

Thank you, Blake, and good morning to everyone. As Blake noted in his comments, Wolverine World Wide is off to an excellent start to fiscal 2011. It's extremely gratifying to come out of the gate with such strong financial results, continuing our record revenue and earnings performances from last year.

The sustained positive momentum in our business is due to the successful execution of a business strategy that calls for, one, investing consistently in our brands to better position them for future growth. Two, maintaining laser like focus on driving backroom efficiencies across our entire operating platform. And three, implementing growth and profitability initiatives across the business to deliver outstanding near-term financial results.

The continued execution of this strategy in the quarter led to record revenue of approximately $331 million, record gross margin of 41.6%, record operating margin of 14.9%, and record return on invested capital of 21.4%. We are pleased to have achieved these results while continuing to support and nurture our brands. To this end, we increased marketing investment by almost 16% to expand brand awareness and consumer loyalty.

We increased product development expense to maintain our strong innovation and grew selling expense to better serve our customers. In keeping with our strategy to utilize our strong cash flow for the benefit of our shareholders, as previously announced, we increased our upcoming quarterly dividend to shareholders by 9%. Taken as a whole, pretty powerful shareholder value creation.

Let's turn to some specifics for the first quarter. As I mentioned, reported revenue for the quarter was a record $330.9 million, representing growth of 16.1% versus the prior year. Foreign exchange helped reported revenue by only $2.8 million, as a stronger British pound and Canadian dollar were partially offset by a slightly weaker euro in the quarter. I'd like to remind everyone that the reorganization we announced in January, the main purpose of which was the creation of a dedicated International Group to accelerate growth of our entire portfolio of brands in markets outside of North America.

That reorganization resulted in a reduction in the number of our branded wholesale operating groups from four to three. For everyone's benefit, a supplemental table was included in this morning's press release that shows 2010 quarterly revenue results under the new operating group structure. The Outdoor Group, which still consists of Merrell footwear and apparel, Chaco and Patagonia footwear, is off to an exceptional start for the year, with revenue in the quarter of $138.1 million, up 21.6% versus the prior year.

Outstanding growth in the US was led by the introduction of Merrell's new Barefoot Collection, the initial success of which Blake discussed in his earlier remarks. Double-digit growth from both Chaco and Patagonia footwear and triple-digit growth from Merrell Apparel rounded out what was an extraordinary quarter for the Outdoor Group. The Heritage Group, which now consists of our Wolverine brand, Caterpillar footwear, Bates, Harley-Davidson footwear and HYTEST had another stand-out quarter with revenue growth of 18.3% to $111.1 million.

Strong double-digit growth for Bates, Wolverine footwear and apparel in the US, and Caterpillar footwear and all of its major geographies led the way for the Heritage Group in the quarter. The Lifestyle Group, consisting of Hush Puppies, Sebago, Cushe and Soft Style, grew its revenue to $52 million, 1.1% over the prior year. Strong growth in Cushe and Hush Puppies third party licensing business was offset by expected softness for Hush Puppies in Europe and the US. Lower close-out sales, some late deliveries from third party factories in India and softness in the mid-tier department store sector accounted for the vast majority of the decline in the US and Europe for Hush Puppies.

It's worth noting that Hush Puppies global unit volume grew in the mid-single-digit range in the quarter which is perhaps a better indicator of the brand's overall momentum. Our other business units, comprised of our Retail Group and Wolverine Leathers, also performed exceptionally well in the quarter with revenue increasing 14.2% to $26.6 million, driven by an increase in retail door count to 91, mid-single-digit comp store increases and continued very strong double-digit growth in our eCommerce business.

From this point forward, my remarks will refer to prior year's numbers that are adjusted for the charges related to the Company's strategic restructuring plan that was completed in Q2 of last year. Gross margin for the quarter was up just a few basis points compared to the prior year's gross margin of 41.6%. The benefit from strategic price increases and a slightly favorable FX impact offset higher product costs and a slightly higher mix of volume direct and special makeup goods. Of particular note, higher product cost negatively impacted our gross margin by only 31 basis points in the quarter due to inventory pre-buys in late fiscal 2010, ahead of announced price increases from third party factories, representing a very strategic use of our balance sheet to protect profit margins.

Most of you are aware that the anti-dumping duties on certain footwear imported into Europe from China and Vietnam expired as of April 1. While certainly welcome news, it will not have a significant financial impact on our outlook for the year. We had already taken action to shift some production down for Europe to countries with more favorable duty treatment and additionally we had re-engineered product and applied for additional product exemptions to lessen the impact of ADD. So, again, good news, but not a source of any significant upside to our full fiscal year outlook.

We generated almost 90 basis points of operating expense leverage in the quarter as SG&A as a percentage of sales dropped to 26.7% from 27.6% in the prior year. Operating expenses increased 12.5% to $88.3 million, compared to $78.5 million in the prior year. Variable costs associated with the quarter's strong revenue performance and, as previously mentioned, continued investments in marketing, sales infrastructure and product development in support of key growth initiatives such as Merrell Barefoot drove the year-over-year increase.

The effective tax rate for the quarter was 28.0% compared to 29% in both the prior year and in the full year 2011 guidance we provided in early February. The lower tax rate versus the prior year is driven by a more favorable dispersion of taxable income to lower tax rate jurisdictions and the inclusion of the US research and development tax credit in this year's first quarter tax rate. Recall that the R&D tax credit hadn't yet been extended for 2010 at this point last year so we couldn't reflect it in last year's Q1 effective tax rate.

The lower tax rate versus our prior guidance is primarily driven by a statutory reduction in corporate tax rates in both Canada and the UK, two significant markets for our Company. Fully diluted weighted average shares outstanding in the quarter were 49.2 million, down slightly from the prior year's 49.5 million. The current year share count reflects repurchases in Q1 of approximately 142,000 shares for $5.1 million. The Company still has approximately $149 million remaining under the current share repurchase authorization. Taken all together, diluted earnings per share in the quarter grew 28.6% to a record $0.72 per share, representing the fifth consecutive quarter of record EPS performance for the Company and an outstanding start to the fiscal year.

We finished the quarter with a consolidated inventory position of $250 million, up 45.5% versus the prior year. Recall that last year's Q1 inventory levels were about 21% lower than the year prior to that. Of the increase this year, about a quarter is due to accelerated purchases of core product to avoid announced factory cost increases, another quarter of the increase reflects higher product and freight cost and inventory for new collections such as Merrell Barefoot, and the balance of the increase reflects inventory to service the improved outlook for the balance of the year.

Healthy inventory levels in the first quarter contributed to our ability to meet increasing customer demand on key products and helped us exceed our expectations for quarterly revenue. We feel very comfortable with our inventory position across the entire portfolio and believe the quality of our inventory has probably never been higher. Our fiscal first quarter is historically a quarter in which operating free cash flow is negative as working capital typically builds from relatively low fiscal year end levels. Our operating cash flow in the first quarter reflects that historical trend as well as a $32 million contribution to the Company's pension plan earlier in the quarter that brought the plan to 100% funded status.

Our unconstrained ability to invest for organic growth reflects a strong cash flow generation of our business model. Despite the expected negative operating cash flow in the first quarter, we ended the quarter with cash and cash equivalents of approximately $92 million, and we expect to deliver significant free cash flow for the full fiscal year. Our plans for 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 I mentioned earlier, we announced in February a 9.1% increase in our next quarterly cash dividend, $0.12 per share payable on May 2 to shareholders of record on April 1. Our order trends during the quarter remained very positive and we ended the quarter with an order backlog that was up approximately 30% versus the prior year with strong double-digit increases across all three branded operating groups.

Based on the outstanding results from the first quarter, the favorable backlog and our own perspective for the remainder of 2011, we are today raising our full year revenue guidance to a range of $1.38 billion to $1.42 billion, representing growth of 10.5% to 13.7% versus the prior year. We are also raising our full year earnings per share guidance to a range up $2.40 to $2.50 per share, representing growth of 10.6% to 15.2% versus the prior year.

Included in this guidance is the assumption of flat full year gross margin and modest full year operating expense leverage. Thanks for your time this morning. I'll now turn the call back over to Blake for some closing comments.

Thanks, Don. We're obviously pleased to have delivered another record quarter for our shareholders and look forward to future success during the rest of 2011. Thanks for your time this morning. We'll now turn the call back to the Operator so we can take your questions.

(Operator Instructions). The first question comes from Kate McShane of Citigroup. Please go ahead.

Hi. Good morning.

Good morning, Kate.

Hi, Kate.

I was just wondering if you could update us on your pricing strategy and what we can expect to see from your product in the fall and winter in terms of price increases?

Yes, Kate, our outlook for product pricing really hasn't changed from last quarter's call where we stated that we expected spring to be up in the mid-single-digit range and fall pricing to be up roughly in the upper-single-digit range. We've been working on that for some time. We've resourced product to some other countries and factories in lower cost regions. We've re-engineered product. We've introduced new product collections with higher gross margins and we've taken some selective price increase. And as Don mentioned, we bought ahead a significant amount of inventory to beat price increases.

So at the moment, we are seeing virtually no pushback to the product price increases that we put at the marketplace. We're a firm believer in being smart enough and doing enough to maintain our gross margins, even in this tough costing environment. So we take a blended multi-pronged approach and our strategies really haven't changed.

Kate, just a little more color from me. As it relates our selling price -- our outlook for the balance of the year, as we've said at our Q4 earnings call and will reiterate today, we're looking at product costs increases in the mid-single-digit range in the first half and high-single-digits in the second half and our selling price strategy is to offset most of those increases with increases in our own selling prices and whatever gap exists between what we're able to do on the selling price side versus the product cost side we expect to offset that via favorable mix shift over the balance of the full year.

In Q1, we actually experienced a negative mix shift as it relates to our gross margin. That's only 12 weeks out of 52. So we're still forecasting a positive mix shift across the portfolio but selling price increases on average a little bit less than the product cost increases that we expect to experience.

Okay. Great. And then my second question is on inventories, just going forward can we expect to see a similar increase in inventory over the next couple of quarters? Can you give any more color behind that?

Yes, what we expect is by the end of the year our inventory position increase year-over-year will be -- we expect, based on our current forecast, substantially less than the full year revenue increase. It may be kind of at the same level versus prior year at the end of Q2, but it starts to trend down in Q3 and Q4 and our outlook for Q4 is inventories will be up much less than the full year revenue increase.

Okay. Thank you very much.

Thanks.

The next question comes from Jim Duffy of Stifel Nicolaus. Please go ahead.

Thank you. And good morning. Great start to the year.

Thanks, Jim.

A few questions. I may have missed this. Could you put some numbers around your backlog position?

Well, we don't usually give raw dollars on our backlog position or break it down by quarter. As Don indicated, it's up just over 30%, which is, frankly, probably a little bit higher than where we expected to be at this particular time. Just to give you a little bit more flavor, as we look ahead for future quarters, I would say our backlog is spread fairly evenly across the future quarters.

Okay.

We disclose the dollar amount of the backlog once per year, Jim, in our 10-K filing and then other than that we kind of give the quarterly, or at quarter end, what the percentage increase is and compared to others in our industry we feel like we're fairly transparent in that regard.

I see. Somehow I missed the percentage increase that you mentioned on the call.

It's plus 30%, yes.

Okay. Helpful. And then with respect to your inventory position versus the composition of your order book, I presume they're well-matched. Can you speak to that, please?

Yes, I mean, we think our inventories, frankly, are as clean as they've ever been. You take some of our bigger brands like Merrell. There were fewer close-out sales in Q1 than prior years or last year, simply because the inventory was so clean. We made some selective pre-buys behind Merrell Barefoot and some other core product but we feel very good about our inventory position right now.

Our checks would suggest the Barefoot inventory is lean at retail. How are you positioned with inventory for Barefoot? Are you prepared to capture the demand that's there?

Yes, we're prepared to capture the demand but, obviously, in our business when you get anything that's this hot, you never can plan that in advance. So if you are asking me, do we wish we had some more Barefoot inventory right now? We would probably say we wished we had some more Barefoot inventory right now. But we've got plans in place to catch up pretty quick.

Great. Okay. And then what are you seeing on the manufacturing landscape? Are capacity constraints still a concern or a challenge?

At least, Jim, for a Company like us that has a pretty big pencil, it doesn't appear to be a capacity issue. What we're working with the factories on is reducing lead times and then just continuing to deal with commodity price increases and the general product costing issues in general. So for us, we haven't really seen a capacity issue, but with oil well over $100 a barrel and rubber and cotton and other commodities up significantly, and high prices also at close to an all-time high, it's a challenging environment.

Okay. Maybe that's a good segue to my last question. Just trying to think about the inventory that you're bringing in early, is that just kind of delaying margin pressure that we will see in the future or is this philosophically buying you time to implement price increases, make adjustments in the business model, et cetera, that you think should help you maintain those gross margins?

You know, one, we think it's smart and we planned accordingly and I think it's probably a little bit of both of those.

Yes, I would have said maybe more the former than the latter but there is definitely some overlap in how you describe those two approaches, at least in my mind. That's the way my mind works.

Okay. Great. Hey, thanks so much.

Okay, thanks, Jim.

The next question comes from Mitch Kummetz of Robert Baird. Please go ahead.

Yes, thanks. A few questions here. On the Barefoot, can you quantify the impact that that had on the quarter?

Well, I think it had -- we don't like to get down to that kind of level of detail. It had a significant impact on Merrell's results in the quarter, primarily here in the US, but I think if you take Barefoot aside, Merrell for the quarter even without Barefoot had a significant double-digit increase in sales.

Okay. And do you think Barefoot could have a bigger impact on the back half as you broaden that line for fall versus spring?

Well, certainly that's our plan. As you know, we went out with a pretty laser-like collection for spring. We're expanding that collection, some more product categories for fall. And we're looking for expanded distribution and expanded sales.

Okay.

Broader collection and expanded distribution but you wouldn't have the initial pipeline still of the accounts that received it in the first quarter, first and second quarter.

Got it. And then, Blake, you mentioned that the Lifestyle business had the greatest percentage backlog increase. I guess that was a little surprising to me. Could you just elaborate on that?

Yes, I mean, all -- if you look at the quarter and look ahead, Sebago is on a -- clearly on a growth curve. Cushe is still relatively small but a spectacular product and it's also very, very early on its growth curve, and Hush Puppies, a business that we started in 1958, just continues to grow internationally. Obviously, over 18 million pairs on a global basis each year, still our largest business.

So it's new product offerings in Sebago and in Cushe and the 1958 Collection, Anna Sui Collection and other offerings by Hush Puppies. It's really across the board and across geographies.

I mean, definitely some significant pieces of good news, looking forward for the Lifestyle Group, Mitch, but also I think the late deliveries in Q1 would contribute to kind of the backlog position going for the balance of the year.

Okay. How much of an impact do the late deliveries have on Q1 revenues for that business?

Oh, probably hurt it -- probably hurt our European business less than $1 million.

Okay.

But significant for that business, but overall for the Company less than $1 million.

Got it. Couple last questions. Don, I know you don't like giving quarterly guidance, but your full year guidance at this point, if you look at the high and the low end of the sales range kind of implies 9% to 13% growth over the balance of the year. Q2 is more of a reorder quarter than Q1. How should we think about Q2 and the outlook for reorders kind of where the environment is right now?

At-once orders picked up in the first quarter, I think our at-once orders were up 8% for orders that came in the door in Q1, still a little bit less than the future order business, but we talked about how we were going to -- what kind of commentary if any we would offer regarding the quarterly outlook. Our backlog is up 30% and that skews fairly ratably across each of the remaining quarters of the fiscal year. Obviously, the dollar amount of Q2 even though it is more of an at-once quarter but the dollar amount of the Q2 backlog as of the end of Q1 is more substantial than Q3 which is more than substantial than Q4. But the year-over-year increases look about the same currently.

Got it. And then last question. On the gross margins, your full year guidance hasn't changed but I think you said on your last call that you expect product costs to be about a 2- to 2.5-point drag on the first half of the year. It was a lot less than that in Q1. So what were the other puts and takes on gross margin in Q1 and how should we be thinking about those puts and takes for the balance of the year? Are product costs going to have less of an impact than what you had originally thought or how should I think about that?

I don't think so. In the first quarter, just to give you a little more color, selling price increases contributed about 220 basis points to the gross margin increase. Foreign exchange was a very minor, like a 10-basis-point contributor. Product costs, as I mentioned in my prepared remarks, was a drag of about 31 basis points, less than what one might have concluded from our guidance from February because of the pre-buy of inventory ahead of announced cost increases.

And then the negative mix that I referred to in my comments, more volume direct and SMU business was a drag of about 150 basis points. When you net all that out, you get to where we are, about 3 basis points up for the quarter.

Our outlook for the balance of the year, we maintain our flat full year gross margin guidance. We certainly expect to see the positive impact of selling price increases continue through the course of the year. As I mentioned in my response to Kate earlier, we expect there to still be a positive mix shift, brand, channel and geography, if you take all those together, a positive mix shift by the end of the year and certainly expect the negative impact of higher product costs to be more meaningful as we cycle through the year.

Got it. All right, thanks. Good luck.

Thank you.

The next question comes from Sam Poser of Sterne, Agee. Please go ahead.

Good morning.

Good morning, Sam.

Just wanted to know, the Hush Puppies, I mean, in the US, the Hush Puppies business, it's just so many fits and starts and stuff. Where are we? How's the 1958 doing here? Are the other parts of the businesses working ? If you could just talk a little bit about

Yes, I mean, let's keep the US business in perspective. It's a, frankly, a fairly small fraction of the total number of global pairs but since we all live in the United States it gets more attention.

We're down for the quarter, though, in overall Hush Puppies and it sounded like that was what was dragging it down.

Right. It was our European and our US business, Sam. We were down in Europe, a lot of that, frankly -- the decrease in Europe was due to the lower close-out sales which is generally a good thing and late product deliveries from India. So most of the late product deliveries centered on Europe. In the US, it was a combination of factors, some softer mid-tier department store catalog business in the quarter which was -- I would not say the business we've been after the last several years.

We've been aiming higher than that. And we're making -- still making progress on the better grade distribution. In the US we also had lower close-out sales which are good and -- but product deliveries here were also pretty good. So we feel we're still making progress in Hush Puppies. As you know, domestically it's never a fast enough for me personally, but we're making good progress and selling to people we should be selling.

And within the guidance that you're giving, I mean, just in a general sense, I know you don't get this granular usually, but are we looking at sort of in the Lifestyle Group, low-single-digits and then everything else up significantly better than that, just sort of in the broader scheme?

Yes, we don't -- Sam, we don't go down to that level for obvious reasons, but we've got plans to grow all of our groups pretty substantially and all of our brands for the fiscal year.

I mean, the backlog position for the Lifestyle Group would imply, obviously, better performance in Q2 through Q4 than the reported revenue in Q1. And I know, Sam, your comments or your questions are focusing on reported revenue because that's the lead number which is heavily influenced by the US performance given that we have full wholesale selling price in the reported numbers, but only 14% of Hush Puppies global volume is in the US.

And, again, to repeat what I said in my prepared remarks, the global unit volume even though we had some late deliveries and had lower close-out sales, the global unit volume for the brand was still up 6% year-over-year in the quarter.

Well, that brings me to a follow-up and one other question. I guess the follow-up is, and we've spoken about this in the past, is have you considered taking over more distributors, creating more subsidiaries in any areas right now, both for Hush Puppies and other brands?

Yes, Sam, we look at that issue. We discuss it on a regular basis. As you know, over the last 15 years we've taken over all of our brands directly in Canada. We've taken over all of our brands pretty much throughout greater Europe. We're constantly looking around the world to see where that may make sense. Certainly, our new international structure will give us more focus and on-the-ground talent to consider some possible new alternatives as we roll forward.

Okay. And then lastly, what is the differential in margin -- in gross margin between your futures-based businesses and your at-once? Because I would assume that the more at-once you do, the better your margins will be?

That's correct. I don't have the -- I don't have the numbers right in front of me, but we will (inaudible) blended overall for the Company, better gross margin from our at-once business versus our future businesses. It may not be significant for some brands but overall blended it would be better.

If we're looking at a brand like Merrell and the backlog there, I would assume -- I mean, Q2 is generally more of a fill-in quarter than Q1 and Q3 is more of a futures-based business, just generally speaking.

That's how it generally trends. But, obviously, we have lots of orders in either category in every quarter.

All right. Thank you. Continued success.

All right, thank you.

Bye-bye.

(Operator Instructions) The next question comes from Chris Svezia of Susquehanna Financial Group. Please go ahead.

Good morning, everyone. Nice job on the quarter.

Yes, Chris, sure.

Thanks.

I guess my first question is just on the Barefoot running program, any color that you can add. You're adding, obviously, a lot of new product as you go into the fall. Any thoughts what's happening internationally, what the reception has been like there and maybe what you're doing from an international perspective as you look to the back half on that product assortment as well?

Yes, as you know, Chris, going back a few years in the book "Born to Run" and the success there, and I guess that's being made into a movie now, it started really -- it really started as primarily a bit of an elite running and US trend. As you know, we're in over 190 countries and territories around the world. We're now starting to see it spread internationally and spread fairly fast internationally.

I think a lot of that has to do with this particular category, the fact that this category is viewed by the consumer as legitimate, but it also has to do with the simple fact that the Merrell product just looks superb. So even if you never wear a pair to run on tarmac in, they're clearly shoes that look fantastic with jeans that you can wear to watch a soccer game or go to yoga class or buy groceries or do anything else in. But we're starting to see some real uptick in Europe and a number of other markets around the world.

Okay. So I think when you -- when you initially gave the launch for the product, I think it was just under half a million pair or thereabouts, was that just the initial launch or is that, as you look further out into fall in terms of what you're planning, or is that just the initial launch of the business and that's mostly domestic based?

Yes, that's just the initial launch. There would be some international product in there where we seeded it in certain markets, especially Europe and a few other markets. That's primarily US and that would be the initial launch.

Okay, so without sticking a number to it, could it be a million pair program this year or is that maybe a little aggressive in terms of the size?

Yes, we don't like to get down into that detail. I'll just say it's significantly above the original half a million pair figure we gave.

Okay. All right. Fair enough. The other question I have is just so I understand, Don, the gross margin thought process for one second. Initially you had talked about the product cost piece and that being 200 or 300 basis points or so in the first half of the year in terms of a headwind, or something along those lines, and now all of a sudden it was significantly less. Mix will be favorable, price increases start to flow in, you're managing the inventory better.

Where do the big challenges come on the gross margin as we look through the balance of the year? Is it pretty much flattish or there's an opportunity to do better than that or -- I'm trying to see what the real big headwind on the gross margin is. If you are getting pricing increases and the headwind on product cost is nowhere to the extent that you initially thought?

Just to set the record straight on what we said is that product cost -- I never said product costs were going to be a 200-basis-point or 250-basis-point hit on margins either in Q1 or whatever. But what we did say is we expected mid-single-digit increases in product costs in the first half and high-single-digit increases in the second half. So having said that, the lower product cost impact in Q1 was driven entirely by the pre-buys of inventory that we made in Q4 2010 that delayed the impact of higher product costs on our reported numbers.

So certainly as we work through inventory that was bought in 2010, we would expect to see the full brunt of product cost increases in our gross margin and so our gross margin in the first quarter was up three basis points. Had it been down three basis points it would be flat. But because it was up three basis points there's a slight increase in gross margin. So that's semantics, if you will.

But what we expect over the balance of the year is, since we're guiding still to flat full year gross margin, obviously, we expect flat gross margin in Q2 through Q4. As you see more of a negative impact on product costs but less of a negative impact on mix shift, in fact, it should be a positive impact over Q2, Q3 and Q4. Does that make sense?

No, no. That's helpful. Okay. And then last thing, just on the $150 million, I guess, cost initiatives you guys were kind of looking at, anything that you've found or any updates you can provide, maybe benefit in the quarter? Any thoughts to that?

Yes, I mean, the work continues. That was the size of the pie that we were attacking and we're kind of attacking it aggressively, yet methodically, both with our internal team as well as the outside resources that we've retained and the actual benefit that flowed through the P&L in the first quarter was about a quarter million dollars.

So we would expect that to accelerate over the balance of the year, but it's one of the many initiatives, probably the most visible that we talk about internally and we share with the outside world in the last earnings call. Work continues at pace and we're very excited about what the opportunities are. But it was about a quarter-million-dollar net benefit in the quarter.

Okay. All right. Well, thank you very much, gentlemen. Appreciate it.

The next question comes from Charu Sharma of KeyBanc. Please go ahead.

Hi. Thanks for taking my question. So I wanted to clarify the new dedicated International Group in terms of, you mentioned they were adding additional seasoned talent and their focus was to get people on the ground in specific key international markets.

So can you give a little bit more color on what markets you're targeting in the near term? Is it in Europe? Is it Asia-Pacific? And anything you can do to give us some color on the breakdown of the world as you're looking at it?

Yes, I mean, for us, we're in 190 countries and territories now around the world. If you look at -- step back and take a look at the world, there's clearly some economies and some regions that are in the fast water. They're moving -- their recovery was faster. Their sustained economic growth is faster than the United States and Western Europe, for example. So we're really ignoring no significant regions around the world.

We've put a seasoned executive in Europe because as good as our business is in Europe we have real opportunities there. We have market share that is rightfully ours in Europe and we're going after that. But then when you look at the Asian economies, including India, greater China, we put a seasoned executive recently in greater China. We put a seasoned executive also in India because that is fast-moving water. Those are economies and consumer groups that can help deliver accelerated growth for your brand.

So we're really not ignoring any markets around the world and while we're focused on bigger markets like India and greater China and Europe, there are lots of other countries around the world that are just on fire right now. It can be Chile. It can be Australia. It can be any number of markets that are in economies that are doing extremely well. Fundamentally, though, we believe we need talent on the ground to help us really maximize the collective power of our brand portfolio and drive some regional strategies.

So along the same lines, is there any market where right now you feel like you have a gap, where you're adding people? I mean, can you share that with us?

Yes, we've been pretty open about this in the past. As I said, we deserve more business in Europe. Okay? We have tremendous Latin America partners and distributors, very strong businesses in the millions of pairs.

Yet, for example, we have very little penetration today for our brands in Brazil. So despite the fact that we're in 190 markets and territories around the world, and I probably can't even name them all, we have some opportunities in select markets and some of them are big and we're constantly white spacing those markets and developing some plans against them.

Okay. And I think on the last call you gave the net breakdown for international overall. It was 62% of revenue, I believe, and 44% of operating income. Would you be able to share that with us again?

Actually, in the first quarter our US revenue was 59%, so our non-US revenue would have been 41%. You maybe are referring to unit volume. On a unit volume base, I don't have the numbers right in front of me, but it would be more along the lines of the numbers you cited.

For this quarter, it would be along those lines on a unit basis?

Yes, about 60% or 65% non-US and 30% or 35% US.

Okay. Great. And my second question was on the consumer direct business. I think you had 90 owned brick-and-mortar stores as of 2010. Can you talk a little about your store opening plans and where you see that opportunity both near term and long term to grow that store base?

Yes, I mean, when we look at our consumer direct business, as you know, it's a strategic growth objective for us. Our direct controlled consumer business right now is only about 7% of our sales. Obviously, if you take a more global look and include our distribution partners, we have almost 6,300 points of dedicated distribution around the world. For ourself, as our own Company, reporting under GAAP, we have mid-term goals to double our consumer direct business from 17% to 15% of our sales.

We think there are plenty of opportunities in the US and globally for Merrell, Merrell is still very early in its growth cycle. Hush Puppies, for example, Hush Puppies closed the quarter with almost 600 dedicated concept stores around the world. Merrell was about 145. That gives you a little bit of the -- little bit of an idea of the runway for Merrell alone.

But Sebago, for example, as a brand is very strong if in Europe. We opened our first Sebago store in Bath, England. It's performing very well. And we have opportunities there.

So we look across our portfolio of brands and all of them are involved in extensive and global shop-in-shop programs, because we see sales uplift whenever we can put a shop-in-shop in place. And then a number of our bigger brands, Hush Puppies, Merrell, but even Sebago, have some real opportunities with their own branded stores.

Great. And my last question was on marketing spend. You mentioned 16% increase this past quarter. How should we think about advertising spend for the remainder of the year?

You should think of it as going up at a double-digit clip.

Okay. Great. Thanks, and best of luck.

Thanks, Charu.

The next question comes from Taposh Bari of Jefferies & Company. Please go ahead.

Good morning, and congratulations.

Hi, Taposh.

Hi.

Hey. So I have a question on just the momentum that you're seeing in your Merrell business, that brand in particular. I know it's been an area of focus for you guys, trying to get to $1 billion in a brand where you've been trying to unlock the value, considering the high level of customer loyalty. So this Barefoot launch seems like it could be a pretty meaningful catalyst in achieving that goal. Just wanted to get your sense or thoughts around that opinion, I guess.

Yes. I mean, if you look -- if you step back and look at Merrell -- it still has in the US, for example, relatively low brand awareness, yet it's the intent to repurchase by the existing Merrell consumer is -- it always ranks number one or two in the entire industry. So that's going to be a catalyst for growth in the future as we expand Merrell advertising and marketing.

The nice thing about Barefoot is that it's appealing to the existing Merrell consumer, but it's also for Merrell opening up new and different distribution channels. Specifically, for example, specialty running shops. Merrell has had some presence in those shops but it's getting a significant presence in those shops and exposing a new -- a whole new consumer base to the Merrell brand.

As far as product category success during the quarter and going forward, it's spread amongst all categories, men's, women's, kids, it's spread on the performance side. It's spread on the more casual side. And we're seeing successes in all areas, not just Barefoot. I think Merrell had a strong double-digit sales increase in the quarter, even without Barefoot.

Okay. And then, I guess, on a point regarding your distribution, can you give us an idea of what kind of door growth you're expecting in the US this year for the Merrell business?

No, I would say right now it would be difficult for me to give you a door count example.

Okay. And then just --

I'm sorry, Taposh, I would say that most of the growth in the US will come from increased velocity through existing doors as opposed to new doors themselves but certainly there's some expansion in door count.

Okay. Great. And then just quickly switching gears onto this conversation of international business and then, I guess, owned versus licensed business, of the 50 million pairs that you sold last year, can you just give us a sense of how many of those were sold through your own distribution that were captured at wholesale versus, you'd call, your licensee and distributor model?

Yes, I'm just trying to see if I can come up with a quick number for you in terms of pairs. I would say today in pairs, including our owned operation, that's Europe, Canada, the United States, about half of the pairs that we market globally go through those markets and I would say about half of our pairs go through our international distributors and licensees.

And it varies quite dramatically by brand, Taposh. Some brands which are primarily US brands, almost all of their global volume goes through owned operations. And on the other end of the spectrum, Hush Puppies, much less than half of the brand's volume goes through owned operations and much more than half goes through third party operations.

Okay. And then just finally on that point, can you give us a sense of what your kind of average royalty stream is as a percentage of the wholesale equivalent for that licensed part of the business? Is it like a high-single-digit? Is high-single-digit a fair approximation?

We don't discuss that kind of detail. For years, though, we've said if you look at our reported financial statements we're 60%, 40%, but when you look on the earnings side we do a flip on those percentages and about 60% of our profits would come from our distributor international operations.

Okay.

Taposh, not to be non-transparent but just for a variety of reasons we don't disclose royalty as a percent.

I understand.

Okay.

And then just last point, I know you kind of talked about this last quarter but, Don, can you just, I guess, clarify what is factory direct? The only reason I ask is it seemed to have had a kind of unexpectedly adverse effect on gross margin the past two quarters now from mix and now it seems like going forward at least throughout the rest of the year you're expecting that to reverse. Just trying to get a sense of, if you can just, again, refresh our memories on what factory direct is? Because outside of that it would have seemed like licensing would have provided a pretty favorable mix benefit to gross margin.

We call it volume direct or as some people use the phrase DC bypass. It's goods that are shipped from China that go out directly to a third party distributor, or whatever country it is sourced from, and goes directly to a third party distributor, or otherwise goes straight to a customer's warehouse as opposed to going through our own warehouses in Michigan. Those on average are probably across the board we have lower gross margin on our volume direct business than we do on goods that ship out of our own warehouse.

Obviously, those that go through our warehouse we receive, we store, we ship, et cetera. There's additional SG&A related to ex-warehouse shipments that you would expect to earn a higher gross margin. Additionally in the quarter, we had a higher percentage, slightly higher percentage of special makeup SMU business which tends to be at a lower gross margin as well. Again, 12 weeks does not a full fiscal year make, and so we still -- our forecast is still for mix broadly defined to be a positive contributor to gross margin for the full fiscal year. But in the quarter, a higher percentage of volume direct this year versus last year and a slightly higher percentage of SMU business this year versus last year was a drag on gross margin.

Okay, thank you. Just one final question. What was your comp store sales growth at retail for the quarter?

Yes, mid-single-digit.

Thank you.

Increase.

Against a 16% comp store increase last year. So pretty good performance.

Great. Thanks, and continued success.

Thanks.

Thank you.

The next question comes from Jonathon Grassi of Longbow Research. Please go ahead.

Hey, good morning, guys.

Good morning.

Couple of, or just one quick question, actually, just a last thing on the Merrell Barefoot. It looks like the starting price points were about $100 to $120 on the initial launch here. Are we looking for -- should we be looking for incremental price increases in the second half of the year on these products or in the first half of 2012? I mean, obviously, if you start getting a little higher, the big box lines, those are probably going to be some -- at the higher end of the price range, it won't be so high in the specialty stores but --

Yes, I agree. Right now we're not looking at -- we priced the initial introduction with all of our 18-month view in front of us as far as product cost. So we are not anticipating any increases or certainly any significant increases in Merrell Barefoot pricing as we look forward here for the next six or 12 months.

Okay. That's all I had. Thank you.

Thank you.

Thanks.

Our next question is a follow-up from Sam Poser of Sterne, Agee. Please go ahead.

Thank you for taking the call again. Just a quick question. With the backlog that you had at the end of -- up 48% at the end of Q4, and I believe the number was around $682 million, is that right?

Are you referring to the 10-K backlog number or --

Yes.

End of Q4 is plus 38%, it was a little bit higher than that in the 10-K which is a mid-February number. But go ahead.

And then on the 10-K, though, the dollar amount was significant. What time period was that backlog representing?

We had some orders, I'm sure, that went probably crept into Q4.

Yes, three quarters.

A little bit of Q4, but, obviously, most of it was the balance of Q1 and a big part of Q2 and then a lesser part in Q3 and then probably a smattering of Q4.

Okay. And then given the demand for some this new product and so on, is the backlog percentage growing significantly relative to the total and your at-once business overall reducing?

Well, I think, Sam, you have to start with, on our backlog, and maybe we shouldn't even give backlog information, but anyway, we think it gives you some transparency and insight into our business as it does us. 2009, huge at-once orders, as you recall, everybody shut off future orders. 2010, a big swing, unusual swing, pendulum went too far, probably back to future orders, lower at-once. And now the pendulum is swinging back to normal.

And that's how we've described this in the past. Frankly, for us, we expect our backlog to be normalized on an apples-to-apples basis by the end of Q2 of this year. So I think you have to almost look back and look at those big pendulum swings between at-once and futures, and obviously in 2010, throughout 2010, as we were getting a much higher percentage of future orders as opposed to at-once orders, that was reflected in a higher backlog that we knew that would be settling down to a more normalized historical level.

And that normalization occurred in the latter part of Q1, Sam, not that we're apologizing about a plus 30% backlog at the end of the quarter but it certainly trended down from the mid-February number that we reported in the 10-K.

Understood. But I guess the question, though, is that, is this sort of a situation where in 2009 where everybody sort of cancelled everything so you had a lot of at-once to the beginning of 2010 where people were feeling better but didn't really know, so things should normalize at the end of Q2 -- I mean, it sounds to me like you're saying things should really normalize at the end of Q2?

Yes, we're getting back to normal, Sam.

And that people still at the beginning of last year weren't sure so it's sort of -- it's just a total balance issue?

Correct. And retailers have had a couple years now to adjust to an incredible recession and adjust their inventories and figure out how to do business and rely on vendors like us. So we see it getting back to normal.

And I guess the one unknown there, shall we say, and it could be material, would be the strength of the Barefoot stuff over the -- just starting now, but through the next 12 to 18 months as people get -- understand the pure velocity of or not of that product?

Yes, that's correct. I mean, you always have a few pockets where you don't have enough inventory and a few pockets of stuff where you have too much, but certainly the significant spike in Barefoot, we're working on that and we're working hard to satisfy consumer demand.

Okay. Great. Well, thank you again and continued success again. Thanks.

All right.

Thanks, Sam.

Thank you. At this time, we have no further questions. 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 today for joining us, and as a reminder our conference call replay is available on our website at www.wolverineworldwide.com, and the replay will be available through April 19, 2012. Thank you, and good day.

Thanks.

This concludes the Wolverine World Wide Incorporated first quarter earnings release conference call. You may now disconnect your line.