Wolverine World Wide Inc (WWW) 2011 Q2 法說會逐字稿

Good morning and welcome to Wolverine Worldwide's second-quarter 2011 earnings results 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 Worldwide. 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 Worldwide. Ms. Cowdin, you may proceed.

Thank you, Andrew. Good morning, everyone, and welcome to our second-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 our second-quarter 2011 results. If you did not yet receive a copy of the press release, please call Brad Van Houte at 616-233-0500 to have one sent to you. The release is also available on many news sites, or it can be viewed from our corporate website at www.wolverineworldwide.com.

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

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

Thanks, Christi. Good morning to everyone and thanks for joining us today. This morning, we reported excellent financial results for the second quarter, including record revenue, operating margin and earnings. The increased pace of growth that began last year continued in Q2 as our team executed well against our global business model and our accelerated growth plans.

Our 12 brands serviced multiple consumer groups in over 190 countries and territories around the world through a multitude of different distribution channels, all of which gives us the opportunity to drive growth across many fronts.

All brands delivered revenue growth in the quarter, and all three brand groups, led by the Outdoor Group and the Merrell brand, posted double-digit revenue increases. Each have strong momentum for the remainder of 2011 and beyond. We have strong product innovation engines in each group, and fundamentally, new product offerings in categories such as Merrell Barefoot are driving our performance. For Q2, every major geographic region reported a double-digit increase in revenue.

The team did a tremendous job delivering in Q2 and I am very optimistic about the remainder of 2011. Don will provide more details on the quarter in a few minutes.

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, continues to be the Company's largest revenue and earnings contributor and was the biggest source of revenue growth in Q2.

Merrell continues to lead the way for the Outdoor group, growing revenue at a very strong double-digit pace, as all product segments performed well at retail. Merrell's global retail footprint also continued to expand in Q2, and the brand now has over 1000 dedicated shop-in-shops and almost 160 concept stores around the world.

Merrell Barefoot, launched in February, continues to gain distribution and has quickly become the most successful product launch in the Company's history. Merrell Barefoot is selling through very well and has allowed the brand to access the influential specialty running shops. Merrell Barefoot is also performing especially well in the outdoor specialty channel, where, according to SportsOne Source and Leisure Trends, it has quickly earned a number two market share position in the minimalist running category.

In addition to Barefoot, Merrell continues to grow its core product segments and expand its position as the market share leader in outdoor footwear. As one small example, no brand is growing faster in core hiking and light hiking categories than Merrell this year. The Merrell team is doing an exceptional job and we look forward to the brand's continued growth and success.

Patagonia Footwear also had a great quarter, delivering strong double-digit revenue growth, especially in the hiking category, where sales increased at a triple-digit pace. Chaco, our pure outdoor adventure brand, also grew modestly in the quarter despite the cold and rainy spring in some parts of the country, which resulted in a soft sandal season.

The Outdoor Group did a phenomenal job during Q2 and the backlog position at quarter end supports our growth expectations for 2011.

Next, I would like to discuss 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.

Caterpillar Footwear had a spectacular Q2, with strong growth in all global regions, especially international distributor markets, which grew at a near triple-digit pace. Product collaborations are helping drive CAT growth in both the core work and lifestyle product categories. Grammy award nominee Chantel has been featured as a CAT earthmover in the current global marketing campaign and consumer reaction has been enthusiastic.

On the core work side in the US, CAT recently announced a partnership with Mike Rowe, host of the Discovery Channel's Dirty Jobs series. Using Mike's experiences in over 230 jobs, CAT has built some of the toughest boots on the planet, which have been well received by retailers.

The Wolverine brand continues to perform well and grow market share in the core US work segment while building momentum in its more fashionable rugged casual business. NPD and SportScanInfo data both show Wolverine is growing market share in core work faster than any of its principal competitors.

The premium-priced 1000 Mile and 1883 collections for the Wolverine brand continue to perform well both in the US and internationally. The success of these programs drove triple-digit growth in international distributor markets in Q2. The global opportunity for the Wolverine brand is significant, and we are looking to our recently-formed International Group to help maximize the opportunity. The Heritage Group had an excellent Q2 and we are very bullish about prospects for the remainder of 2011.

Let's now turn to the Lifestyle Group, which includes Hush Puppies, Sebago, Soft Style, and the most useful consumer brand in our portfolio, Cushe. All brands contributed to the strong revenue growth in the quarter.

Cushe, our action sports-inspired brand, is simply growing fast, as evidenced by its triple-digit revenue increase in the quarter. While still a very young brand, Cushe is quickly becoming a meaningful top-line contributor due to its exceptional product design and attractive brand positioning aimed at a younger consumer. The environmentally-friendly Shucoon concept won the coveted Best Product in Show award over 995 brands and collections at the recent Pitti Uomo show in Italy. Cushe is performing well at retail and is currently among Nordstrom's top five best-selling men's brands. The future remains very bright for Cushe.

Sebago also delivered very strong revenue growth in Q2, as their product collaboration strategy continues to drive brand interest with influential fashion retailers and consumers. The success of the Artisan and Filson collaborations led to the creation of pop-up shops in Q2 at some of the most recognizable retailers in the US and France, including Fred Segal, Ubiq, Sportie LA, Ancie te Diem and Printemps in Paris.

We will open our second Company-owned Sebago concept store this fall on London's famous Regent Street, amongst the world's leading premium fashion brands. This store, like our first one in Bath, England, will showcase a full lifestyle brand presentation that includes footwear, apparel and accessories.

Turning to Hush Puppies, Q2 revenue growth for our classic American casual brand was driven by strong double-digit revenue increases in our European and international distributor businesses. Global pairs grew at a double-digit pace in the quarter. Hush Puppies remains our largest brand in terms of global pairs sold in retail door count. The brand added 87 shop-in-shops and 15 concept stores globally, and closed the quarter with close to 2100 dedicated points of global distribution, including over 600 standalone concept stores. Growth in the quarter was driven by focused product marketing concepts, including the Body Shoe, 1958 and Laid-Back Luxe collections.

All brands within the Lifestyle Group ended the quarter with a strong backlog increase and we expect growth to continue throughout the remainder of 2011.

We are very excited to report another quarter of record financial performance, which for us is fundamentally driven by a fanatical focus on product innovation. At the same time, we remain committed to continued investment behind our specific growth initiatives, especially our Merrell, Sebago, Chaco and Cushe brands, and our international initiatives.

The appeal of our portfolio of brands and global momentum in the business are strong, and we made the decision to enhance the strategic investments that have resulted in our record performance over the last six quarters. These investments are focused on driving brand awareness and consumer demand creation, and we will continue to increase our marketing spend at a double-digit pace behind key initiatives.

As our business continues to accelerate, we will also invest in additional sales support, as well as the initiatives being cultivated by our new standalone International Group to drive future global opportunities.

In the beginning of the year, we established aggressive internal growth goals, and I'm proud of our team's execution in the first half of 2011. Every brand in our portfolio has identified opportunities to achieve growth, and we have several initiatives that are frankly exceeding our expectations.

It is also a very good time to be diversified and to have our brands in more than 190 countries and markets around the world, as the pace of the economic recovery in most global markets has been faster than in Europe or the United States.

As thrilled as I am about our record performance this quarter, I'm even more excited about the potential that lays ahead for the Company and our brands. And I just want to say thanks to everybody on the Wolverine team who is listening in for making another record quarter possible.

I will now turn the call over to Don Grimes, our Senior Vice President and CFO, who will provide you with additional information regarding our Q2 results and our outlook for the rest of 2011.

Thank you, Blake, and good morning to everyone. I am extremely pleased to once again be discussing record quarterly results, results that were driven by the continued strong performance of the 12 lifestyle brands in our portfolio.

The power of our business model leveraged on a global basis has been driving momentum in our business for the last year and a half with double-digit revenue growth in all but one quarter over that time span. We had record revenue, record operating margin and record earnings per share in the quarter, representing our fourth consecutive quarter of record revenue and sixth consecutive quarter of record earnings per share.

Our trailing 12 months gross profit is now comfortably over one $0.5 billion, our trailing 12 months EBITDA is approaching $180 million and our return on average invested capital at 21.4% remains among the very best in our industry. We are delivering these tremendously strong record results while, as Blake just described, continuing to invest in important growth initiatives, investments in product innovation, investments in people and investments in brand awareness, all of which we believe will yield significant returns down the road.

Turning to some details for the quarter, reported revenue for the quarter was a record $310.1 million, representing growth of 20.1% versus the prior year. A weaker US dollar boosted reported revenue by about $6.3 million in the quarter. Our Outdoor Group, consisting of Merrell Footwear and Apparel, Chaco and Patagonia Footwear, led the way with quarterly revenue of $127.3 million, up 30% versus the prior year.

This outstanding growth, which represents the strongest quarterly revenue growth for the Outdoor Group in several years, was led by Merrell Barefoot, as this new collection continues to gain momentum with consumers through existing and new distribution channels. It is important to note, however, that only about a third of the growth in unit volume for Merrell Footwear was driven by Merrell Barefoot. Growth from Merrell's other footwear lines and continued outstanding performance from Merrell Apparel and Patagonia Footwear also contributed to the great performance. It was a phenomenal revenue quarter for the Outdoor Group.

The Heritage Group, consisting of the Wolverine brand, Caterpillar Footwear, Bates, Harley-Davidson Footwear and HYTEST, had another impressive quarter, as revenue grew 15% to $102.9 million. Every brand in the Group delivered revenue growth, but the story of the quarter was the spectacular performance of Caterpillar Footwear, which had strong double-digit revenue growth in each of its major geographic regions.

The Lifestyle Group, which consists of Hush Puppies, Sebago, Cushe and SoftStyle, grew its revenue 17.5% to $41.5 million. Double-digit growth in Cushe, SoftStyle Sebago and Hush Puppies international business were major contributors in the quarter.

The strategy to focus the Hush Puppies brand in the US on higher-margin and better-grade distribution is proving successful, helping drive a 400 basis point increase in the brand's domestic gross margin in the quarter. To repeat a point that I make frequently, because of our licensee business model in most markets outside of the US, the global strength of the Hush Puppies brand and, importantly, its contribution to Wolverine's bottom line, is understated by focusing only on reported revenue. Global unit volume for Hush Puppies was up over 14% in the quarter, substantially in excess of the brand's growth in reported revenue.

Our other business units delivered a solid quarter, as mid-single-digit comp store sales gains in our retail store fleet, an increase in store count to 92 at quarter-end and continued very strong organic growth from our e-commerce business, including four new consumer websites, more than offset lower revenue from our Wolverine Leathers business. We continue to make progress toward our goal of becoming a best-in-class retailer as brick-and-mortar sales per square foot and four-wall operating margin were both up meaningfully in the quarter.

Gross margin for the quarter was 39.4% compared to the prior year's adjusted gross margin of 40.3%. The gross margin decline in the quarter is almost completely attributable to temporary issues in the quarter related to our own manufacturing operations. We have taken corrective action and expect significantly improved results over the balance of the year.

The other puts and takes on gross margin, including foreign exchange, selling price increases, product cost and freight increases, and brand and channel mix, netted to essentially equal to the prior year. Although I will mention it again in a few minutes when I'm discussing full-year guidance, I will give you a little preview now by saying that we are comfortable forecasting full-year gross margin essentially flat with the prior year.

We generated very nice operating expense leverage in the quarter, as SG&A dropped to 28.6% of sales from an adjusted 29.7% of sales in the prior year. Reported operating expenses increased 15.7% to $88.8 million compared to an adjusted $76.7 million in the prior year, with foreign exchange driving about 2.5% of the reported growth.

About half of the constant currency increase is incremental marketing spend, both in support of new initiatives such as Merrell Barefoot and in support of our goal to drive increased brand awareness across the portfolio. About a third of the constant currency increase represents variable costs associated with our outstanding growth in the quarter, primarily variable distribution costs and commissions.

The effective tax rate for the quarter is 25.7% compared to 29% in the prior year. The lower tax rate in the quarter versus the prior year was driven by the absence in last year's Q2 of the benefits from the US Research & Development tax credit that wasn't extended by Congress until late in the year, and by the favorable settlement in this year's Q2 of a state tax audit. This latter item is a one-time benefit that had a meaningful impact on the second quarter and will have a slight positive impact on the full-year tax rate.

Fully-diluted weighted average shares outstanding in the quarter were 49.3 million, up slightly from the prior year's 49.0 million. We repurchased approximately 479,000 shares during the quarter at an aggregate cost of $18.1 million; therefore, an average cost of $37.79 per share. The Company has approximately $131 million remaining under its current share repurchase authorization.

Getting to the bottom line, diluted earnings per share in the quarter grew 23.1% to $0.48. It bears repeating that this represents the Company's sixth consecutive quarter of record EPS performance.

Consolidated inventories at the end of the quarter were $249.9 million, an increase of 46.3% versus the prior year, which was consistent with our internal forecast. Recall that our inventory levels at this point last year were still unusually low compared to historical norms. Higher product costs contributed just under $20 million, or a quarter of the increase, and a weaker US dollar contributed another $7 million of the increase.

During our first-quarter call, we discussed the drivers behind our inventory position, which included investment buys of core product ahead of cost increases, inventory to support new collections, and the positive outlook for the balance of the year. We still expect that our year-over-year inventory position will be at a more normalized level by the end of the year, and expect year-over-year inventory growth to be less than the Company's full-year revenue growth. Bottom line, we remain comfortable with the level and composition of our inventory.

We ended the quarter with cash and cash equivalents of $118.5 million and a modest $20 million draw on our revolving line of credit. 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.

Turning to our backlog, recall that our backlog throughout all of 2010 benefited from retailers placing unusually large futures orders early in response to supply constraints, lengthening lead-times and rising prices, the result of which was historically high backlog growth at the end of each quarter last year and at the end of the first quarter this year.

As we previously predicted, our backlog position has moderated, and we are now back to a more normalized backlog environment. Our backlog at the end of Q2 was up a strong 13% plus versus the prior year, with all three branded operating groups having substantially positive backlogs, growth that is partially offset by a lower backlog from our Leathers business.

We are pleased to report such an outstanding Q2 on the heels of a very strong Q1. Our brand portfolio remains very well-positioned in the minds of retails and the hearts of consumers around the world. Nevertheless, we will definitely be facing tougher comparisons in the second half this year, given the excellent growth we delivered in last year's third and fourth quarter.

To that end, we are pleased to reaffirm our full-year revenue estimate in the range of $1.38 billion to $1.42 billion, representing growth of 10.5% to 13.7% versus the prior year, and also reaffirm our full-year earnings per share estimate in the range of $2.40 to $2.50 per share, representing growth of 10.6% to 15.2% versus the prior year.

Assumptions embedded in this guidance include, as noted a few minutes ago, full-year gross margin approximately equal to the prior year, modest full-year operating expense leverage and a full-year effective tax rate of 28%. Note that this tax rate is the same as our previous guidance despite the favorable state tax audit settlement that I mentioned earlier, the benefit of which is all captured in the second quarter's results.

For those of you that build models on Wolverine, I want to give you some additional perspective on the flow of revenue and earnings over the balance of the year. First, as it relates to revenue, recall that last year we had a $4.5 million shipment of Merrell and CAT product to a third-party distributor that slipped into Q3 from Q2. In this year's Q2, we actually over-delivered our internal forecast for shipments to third-party distributors by about $6 million. It is important to keep both of these timing issues in mind as you model Q3 and Q4 revenue growth.

Year-to-date gross margin is 50 basis points lower than the prior year, and we are guiding to flat full-year gross margin. The guidance implies, obviously, gross margin expansion in the second half. We expect modest gross margin contraction in Q3, followed by more robust gross margin expansion in Q4.

The fourth quarter outlook for gross margin is partially driven by the expectation of lower LIFO expense and partially driven by favorable FX, as forward contracts mature in Q3 and flow through cost of sales in Q4 at more favorable rates than in the prior year.

Additionally and importantly, we intend to continue to make strategic investments to build on the momentum we have developed over the last year and a half. We remain firmly committed to the belief that for key brands in our portfolio, investments to build brand awareness will drive product trial, and product trial will drive brand adoption. We intend to continue to increase our marketing spend behind key brands at a double-digit clip.

Additionally, certain brands in our portfolio are requiring sales support to help expand points of distribution in our subsidiary markets. In order to realize the full potential that these brands represent, it is necessary to invest now in order to deliver continued strong results in 2012 and beyond.

Finally, we reorganized our branded operations in January of this year by creating a standalone International Group to manage our business in both subsidiary markets and third-party distributor and licensee markets outside of North America and to help accelerate the growth of our portfolio in these key regions around the world. As expected, we are incurring incremental costs related to this important international growth initiative, but we firmly believe that these are investments that will yield significant returns to Wolverine shareholders over time. All of these are textbook examples of investing now to drive accelerated growth in revenue, profits and cash flow down the road.

We have delivered approximately 100 basis points of operating expense leverage in the first half, and I would expect slight deleverage in the second half as we pursue these initiatives, still delivering modest full-year SG&A leverage. I hope this additional commentary helps square our strong full-year guidance with the even stronger year-to-date results.

Thank you for your time this morning. I will now turn the call back over to Blake for some closing comments.

Thanks, Don. We are obviously excited to have delivered another record quarter for our shareholders and look forward to future success for the rest of 2011. 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.

Thanks. Good morning everyone. Don, I understand the inventory growth was in the context of your expectations. It looks high to those of us looking at it from the outside.

You mentioned the FX. If we look to the different operating groups, where is the inventory growth concentrated, what are the types of products lines it is concentrated in? Blake mentioned a difficult sandal period. Where are you with respect to sandal inventories? Any more color you could provide there I think would be helpful.

I will start off and then Blake can fill in some additional commentary, if he chooses to. In last quarter's call, I know in the follow-up calls and in the investor conferences that we attended throughout May and June, we did guide to most of the improvement in year-over-year inventories were going to occur in the back half of the year and probably more Q4 than Q3, based on our current forecast.

Of the $79 million of increase Q2 versus Q2, about a quarter of that, or about $20 million, was related to new collections. Most of the inventory increase by operating group is the Outdoor Group, but it is our biggest operating group and has kind of the most new activity going on. So it is not surprising that most of the inventory increase is within the Outdoor Group.

FX was not a help to inventory in reported dollars, so that was about $7 million of the increase. On a unit volume basis, our inventory was up in the mid-30% range year over year, so substantially below the dollar increase.

So I guess bottom line, we still -- we feel comfortable with the composition of the inventory. We expected it was going to be more of a back-half improvement. We had made commentary to that effect. And so it didn't surprise us that inventory came in where it came at Q2, and we expect it to be down meaningfully by the end of the year.

I guess with respect to the sandal season, everybody knows I hate to use the weather; I never let our people use weather as an excuse, but it does exist. Probably the brand that was most affected by kind of the cold and rainy spring season was Chaco, which, as you know, is migrating into four-season and closed-toe footwear. A lot of that is core product that is carrying through and being used for sell-through.

I think there was some impact on some of the Merrell women's land sandals, but they sold through actually pretty well, and any excesses here and there, we have more than taken care of. So, it was really concentrated in one of our smaller brands, Chaco, this year.

Okay, and Blake, I am curious as to the direction of the Merrell Apparel in the backlog. Any color you could provide there would be helpful.

Yes, I mean, I didn't go it into in any great detail. But both our Merrell Apparel and Wolverine Apparel had really excellent quarters. I think Merrell Apparel was up over 60% in the quarter; not a huge business yet, but great improvement across really all product categories. The backlog for Merrell Apparel is up very strong double digits.

Wolverine Apparel in the quarter, I think was up over 80%, just to give you a little more flavor. And again, not a huge business for us right now, but an important and growing business. And that backlog was also double-digit. So, you know, we are happy with the progress and the momentum in our apparel businesses.

That is great to hear. Last question, Don, what are the FX assumptions implied in the guidance? Has there been any change since the last quarter?

I know there has been change in the guidance. We are using rates that are pretty close to today's spot rate. Actually, when I was looking at -- comparing the spot rate to our forecast rate this morning, I was somewhat surprised that we didn't have more of a cushion in there. But we are using $1.60 for the pound, $1.38 for the euro and $1.01 for the Canadian dollar, which are the three currencies that we are most exposed to.

Great, thank you.

Edward Yruma, KeyBanc Capital Markets.

Hi. Congratulations on a good quarter. This is Jane in for Ed. I just had a couple quick questions. The first was how much did the tax settlement benefit drop to -- how much of that benefited the bottom line in Q2, and how should we think about the effect on bottom line in Q3 and Q4?

The tax settlement was a penny and a half favorable to the guidance that we had previously issued in Q2. And that settlement itself will not impact Q3 and Q4's tax rate because it was all taken in the Q2.

Oh, okay. And then in terms of -- what are you seeing on the acquisition front?

Well, a lot of activity.

I mean in terms of opportunity.

I think we are seeing a lot of activity. Money is still relatively cheap out there. Some of the private equity folks are back in the game after maybe a little pause for a year or year and a half. As you know, we have a very good track record of adding brands to our portfolio and making them a success.

Don and I are actively looking. We spend a lot of our time in that area, looking for brands that are appropriate for us. We have got a business model that generates lots of cash and we have got a lot of wherewithal and we have got a lot of people talent. So we are looking -- constantly looking for the right fit with the Company. It could be domestic, it could be offshore. It could be footwear, it could be apparel.

But there has been a lot of M&A activity on both the retail side and the brand ownership side, and probably don't see that slowing down in the very near future.

Okay, great. And just my last question was on inventories at the retailers; you said the backlog was becoming more normalized today. Have you seen retailers' inventories -- are they still cautious or are they returning to sort of pre-recession levels?

Well, I think you have to separate it, you know -- first of all, the US and Europe from the rest of the world. The rest of the world is roaring along right now. But if you look at Europe and the US, I think things have gotten down to a normalized pace and expectation. Retailers are more comfortable today that they can get the inventory they need from their brand partners, especially here in the United States.

So in that respect, we think that at least footwear inventory at retail is in very good shape. Despite the macroeconomic headlines that we see every day, this has been a very good year for footwear. So the historical trend that footwear does very well in a little bit tougher economic times is holding true even this year.

So footwear inventory at the retail level, we think is in very good shape. I think retailers have adjusted to the new normal and they are expecting their key brands and their bigger brands to have the inventory they need when they need it.

Okay. That was very helpful. Thank you.

Mitch Kummetz, Robert W. Baird.

Thanks. Let's see -- I have got a few questions. The first, on the gross margin, can you just elaborate on what some of these -- the manufacturing issue was in the quarter and then and why you think it is temporary?

It really comes down to three basic things -- underutilization of our Michigan factory, some raw material increases and prices that we hadn't fully built into our plant. And then we had some quality issues with one military boot that have been addressed, that probably also contributed to the underutilization of the factory. So in our minds, we kind of view it as an unfortunate Q2 event, but something that we've addressed and is behind us.

And then on the gross margin guidance for the year, obviously, you are reiterating that. And, Don, you provided a little color on Q3, Q4. I think you said for Q3, modest gross margin contraction. I am just wondering what your definition of modest is.

Well, I will say north of zero -- or I guess I should say south of zero. South of zero, but in the zero to 100 basis point range would be -- and just answering the generic question of how I view modest would be in that less than 100 basis point range.

Got it. That's helpful. And then on the backlog, I know that you guys are expecting that to moderate. You are going up against some tougher compares as you go through the year. I know on the last call, it was plus 30, and I think you had said that it was sort of consistent across the quarters. Although I know in the back half, you didn't have all of your orders in.

So how should we be thinking about a 13 -- I mean, when you look at that up 13, how does that look Q3 versus Q4? I would imagine there is no Q1 of next year business in there, or maybe there is. And then just kind of reconcile that with your sales guidance. So given your full-year guidance now, that kind of implies 5% to 10% growth in the back half. So how should we be thinking about just reconciling those two things?

And then maybe if you could give me some color on kind of maybe Q3, Q4. I would imagine you expect less growth in Q4, just given the tougher compare there.

Well, that is a lot. Let me see if I can handle it in a coherent manner. I guess if you go back historically, before over the last couple of years we had these large wild swings -- not only us, but our industry -- with no future orders, then a total swing back to future orders and away from at once -- it is real -- in our mind, as we indicated several times in prior calls, we have reached back to normal now by the end of Q2.

So historically, for our Company, anytime in the past we were able to report a double-digit backlog increase, that was a very good macro indicator of the future momentum of the business. So at the moment, we have seen a swing back to what I would call normalized at-once orders domestically here, from retailers. They have expected their brand owners to have the inventory in stock.

With respect to our backlog, we had a little bit -- we have some of next year's in our backlog number right now and would normally have at this time. But it is mostly Q3 and Q4, and I would think it is pretty evenly spread between Q3 and Q4.

In terms of backlog growth.

In terms of backlog growth.

Given a tougher compare in Q4, though, should we be modeling less sales growth in the fourth quarter than the third quarter as we update our models?

I think it's the tougher comparison in Q4. We don't have too many quarters that are plus 23%, although we are pretty close this quarter. But I would say that would be a fair statement.

Okay. And then last question, on the Barefoot collection. I think going into this year, I think you might have said on your -- I think it might have been on your Q3 -- probably your Q4 call, I think you said you had about 400 pairs -- I'm sorry 400,000 pairs in backlog. Maybe it was 500,000 pairs in backlog.

How does Barefoot look going into the back half of this year in terms of backlog? Do you actually have more pairs in there? I know you have expanded the line for fall and I think you have expanded some of the distribution. I'm just kind of wondering how you expect Barefoot to contribute to your growth in the back half.

We think it is going to contribute. The momentum has not stopped. Without going into great numbers and going into too much detail, the backlog we have on Barefoot is fairly large. The business has continued to gain momentum, both in terms of future orders and at-once orders.

The product -- more importantly than any of our numbers in backlog are initial fill-ins that the product is checking out at retail. And it is especially checking out in those channels that have a little bit more of a sit-and-fit and knowledgeable environment -- the REIs, the Nordstroms of the world, the independents, the outdoor specialty channels. The sell-through there has been very good, which bodes well for the future.

So we remain -- you know, we remain very positive about Merrell Barefoot. It was certainly a shot in the arm this quarter, but as Don indicated, it was -- as good as it was, it was only a third of the growth in pairage that the Merrell brand experienced in the quarter. So Merrell is really having success across all product categories, but especially Barefoot.

Okay, thanks. Good luck.

(Operator Instructions). Diana Katz, Lazard Capital Markets.

Thank you. Great quarter. You mentioned that each major geography posted a double-digit increase in revenue, which would include Europe. Did any of the growth come from the UK in the quarter?

I'd say the answer is yes. I mean, our business in Europe is so heavily weighted to the UK that kind of as the UK goes, so goes Europe for us, as we're working hard to develop our business on the Continent. So the answer to your question would be yes.

So can you discuss the environment there? Has it stabilized? Are you seeing -- I mean, clearly, you are seeing.

It is -- like the United States, it is a little bit up and down. It depends on the country. What seems to be clear, though, if you are there with authentic Heritage products, something that is cutting-edge, something that is new and fresh, you are going to do very well despite the macroeconomic condition.

So we try and focus on product innovation and surprising our customers and retailers every season. And that is paying dividends both in the US here, where things are still maybe a little slow on the macro side, and certainly in Europe. I mean, there are some countries in Europe -- Greece and Portugal and Spain a little bit, with the unemployment rate -- that are struggling maybe even a little more than the UK and France. Germany, you know, with its export engine is certainly a bright spot.

Great. And then while it's small, but can you just elaborate a little bit on the lower growth in the Leathers business?

Yes, it's a -- as you know, a very, very small component of our overall business. I think this year, as people have been focused on taking every penny out of their footwear that they can, that they have traded down to some lower quality materials, where maybe in the past they would have ordered a little bit more of our pigskin suede proprietary leather product.

So I think that is contributing to a little bit of the slowness in that, as all companies and brands -- and as you know, we use that leather internally and sell a lot of it to other brands -- are really trying to focus on maintaining their margins.

Okay. And you've talked about your ability to flow through price increases in the market before. Are there any new incremental data points you can provide on price increases in the market and how the consumer is reacting?

Well, again, I think if you are there with the right product and the right brand and the right marketing support, we have not seen that much pushback right now. Like everybody, some of our products have moved from good, better and best up into the better and best categories with the price increases we have taken over the last three or four seasons. But we are backfilling that with new product in the good category level.

So right now, I would say that all the consumers read the same headlines we all do, and they know what the situation is like in China and the Far East as far as price increases. And I would think the luxury side of the market has been -- almost has had no impact. The mid-tier levels, a little bit more so. And the people -- the consumer segment that has really had a significant impact would be the lower segment, where we really don't play.

Our sell-through data has remained quite strong for markets in which we get accurate and timely sell-through data. Our analysis shows that our own selling price increases contributed over 300 basis points of gross margin improvement in the quarter. So we have kind of gotten ahead of some of the cost pressures that we have experienced and it has been fairly well-received by both retailers and consumers, we believe.

Great color. Final question that I had was just can you talk about the strength behind Caterpillar Footwear? I know positioned internationally, it is a non-work boot. I just wonder if you could elaborate on how that brand's positioned internationally and how it is perceived.

I think you have to remember that the Caterpillar business started out here in the United States as a work boot brand and remains rooted in that heritage. And Heritage as a brand is obviously the big yellow machine.

But around the world, especially in key regions, Latin America and the Far East, the brand seems to have special consumer appeal. Fundamentally, what is driving that success right now is unbelievable product, the expansion of the line into some great women's categories, which is having success. As you know, CAT has historically been more of a men's brand than a women's brand. The opportunity is big in women. And then some great marketing initiatives behind it.

So it is just really everything clicking together at once for that brand right now. And that brand only has about -- I don't know -- 15% of its pairs here in the United States, roughly, just to put things in perspective.

Great. Thanks very much. Good luck in the back half.

Sam Poser, Sterne, Agee.

Good morning. Just a couple of questions. Number one, on the other expense line, Don, which looks like another penny and a half, can you just walk through that?

It is almost completely foreign exchange translation losses from our foreign subsidiaries into US dollars. Or actually, it was actually mainly translating US dollars that were being held by our foreign subsidiaries back into local currency, and then translating that back into -- or consolidating that into our US results. It was all FX-related. There was nothing else going on there, other than FX translation.

How should we think about that within the guidance for the balance of the year?

Essentially, no additional significant hit like that for us. Sure to normalize, yes.

Okay. So you almost have an offset there for the tax -- I mean, that really -- you got 2.5% on the tax rate -- or you got 1.5% on the tax rate and you lost 1.5% on the exchange.

That's right.

Okay. I just want to go back to the revenue and the comparisons for [via] last year, sort of to follow up on Mitch's questions. When you look at 2010 numbers, even though they were quite big, it seems to me that you have a lot more in the hopper this year, given Barefoot and some of the momentum you have going on with CAT and Chaco and so on and so forth.

You didn't raise the numbers, but you sort of have a -- and it's a more difficult comparison, but sort of on an apples-to-apples basis, I mean, is this a conservative number for sort of not knowing what the economy is going to do in the guidance right now towards the back half? Because your backlog is stronger than you've implied in the guidance and so on.

I will answer; then Blake can fill in. I would say there is a different level of conservatism from the bottom end of our revenue guidance to the top end. I would say $1.38 billion has some conservatism built into it, and as you move up towards the top end of our guidance, there is less conservatism built into it.

You alluded to the timing issues that I mentioned in my prepared remarks. If you adjust our revenue guidance for those timing issues, both last year and this year's timing issues, you get -- the top end of our range works out to almost plus 12% back-half revenue growth, kind of organic, if you will, if you adjust for the timing issues.

So I don't want to be in a position to apologize for a double-digit revenue growth forecasted on the heels of what was plus 18% year-to-date revenue growth. So it is a little bit lower than the first half, but it still represents a very strong expected performance. And again, I don't think there is too much conservatism built into certainly numbers past the midpoint of the revenue guidance. Does that help?

Yes. I don't know if Blake wanted to say anything, and then I just had one more question.

I would use the term realistic instead of conservative. But, you know, obviously, you know our team, Sam. We are always pulling in the trenches for all the revenue increases that we can get and market share we can take from our competitors.

And then lastly, I mean, within the same vein, can you give us some form of sort of maybe one, two, three or whatever detail you would like to give us on -- by the Heritage Group, Outdoor Group and Lifestyle Group, about how you see those revenues? Can you give us a little more drill-down within that guidance number on how you are looking at each one?

Just to maybe give you a little color, if we looked at our backlog, the backlog is spread double-digits across all of our three brand groups, for example. So we are not sitting here today with all of our backlog in Merrell Barefoot. Certainly all of our brand groups have a double-digit backlog position.

This quarter was especially good. It is hard with 12 brands in all these geographic regions to report growth in every single brand and double-digit growth in every single group and geographic region every quarter. But we feel pretty good now about our mix. And inherently, as you know, the strength of our business model is a lot of different consumer -- target consumers, a lot of different distribution channels, 190 countries around the world. It takes risk out of the equation for us. And that is one of the reasons why fundamentally we can overdeliver most quarters, most years.

Thanks. Sorry, I have one more. In your investments, are you -- is this a situation where you are continuing the investment spend, marketing and so on, to continue to make sure that you grab that share from others? I assume there are some investments going into having people hunting for acquisitions and so on and so forth as well. I mean --

Basically, we feel at the time we have the product right, we have the marketing right; it is a time to spend. We are in a very fortunate position where we can spend and do the right thing and still deliver record results. And so that is what we are going to do fundamentally, because we think we have got opportunities within brands and brand segments and geographically we have opportunities.

Would you expect that to sort of settle down, assuming the momentum sort of maintains itself, you find an acquisition here or there. Would that settle down so when you do have these big kind of numbers you could lever the results even more?

I really don't think so. If you asked me my preference, I hope we continue to over-perform so we can have double-digit increases in our marketing spend, in our people investments, behind key initiatives for the next several years. I mean, we like the balance we currently have.

But additional color on that, Sam, is I think we are looking to grow our operating margin on an annual basis going forward. So we are going to evaluate our appetite for investment with how our brands are performing, what the overall -- how the market is in major economies in which we compete. Our goal is not only to grow gross margin, but it's also to leverage our operating expenses to the extent that we can and it is prudent to do so. So we will be looking to grow operating margin on a go-forward basis.

Is there any target you have like out five years or something like that?

We talked about a medium-term goal of getting to 13% operating margin. We sort of were talking about that prior to the recession. Then we sort of stopped talking about it in the midst of the recession. And now we are back comfortable with talking about that as an intermediate goal for the Company.

Thanks very much. Continued success.

(Operator Instructions). Chris Svezia, Susquehanna.

Good morning, everyone, and nice job on the quarter there. I just have a handful of questions here. I guess on the backlog, up 13%, Don, any color between units versus average selling price in that backlog, if you could tell about that.

In terms of units, it was up in the high single digits. So obviously, higher selling prices are contributing to the backlog in dollars. Still double digits -- in units -- sorry - high single digits in (inaudible) but still -- so obviously, low double digits in terms of unit growth. So still feel good about that. I am sorry -- what was the second part of your question?

I was asking between -- on the 13% backlog, between unit growth -- how you break that out between unit growth and how you look at average selling price, between the two of them. And you were just saying from a unit perspective, it is up high single digit, or --.

Right at low double digit, so below the 13%. So therefore, the average selling price in the backlog would be up versus the prior year, to get to the plus 13% backlog in dollars.

Okay. And then when you look at the third quarter and you are talking about just on the gross margin, you know, it being down slightly, just any particular reason? Is that just from an input cost? Is that anything related to mix? Just kind of curious as to why, given it's such a high futures contract quarter, given kind of pricing and how you guys are looking for pricing throughout the year, you'd get some of that benefit from increased prices. Just kind of your thoughts as to why it would be down modestly.

Actually, the delta between the impact of the selling price increases and the higher product costs narrows in Q3; it comes a lot closer together. Based on current forecasts, we are anticipating a bit of a negative mix hit in the third quarter. Still positive contribution from brand mix, but a negative contribution from channel mix in the quarter. Slight negative on foreign exchange in the quarter. That kind of gets us down to that kind of modest gross margin contraction in the quarter.

And then in Q4, still a delta between the selling price increase and the product cost increase, but a favorable mix impact in the quarter. Than as I mentioned during my remarks, favorable contribution from both LIFO and foreign exchange in the fourth quarter contributing to a pretty significant gross margin expansion in Q4.

And, as you know, this is more detail than we typically provide on a quarterly basis because we maintain we don't provide quarterly guidance. But we think it is important for you guys to understand the timing shifts between Q3 and Q4.

It is very helpful, though, Don. We do appreciate it.

I know, I know. So when we offer it, then we are held accountable to it too.

That is kind of your job. You guys have good visibility into your business. Come on.

I want to ask, just from a pricing perspective, as you guys look out -- because I know it was like input costs up mid-singles in the first half, high singles in the back half. As you start to make some bookings for first quarter, spring of next year, any thoughts just from an input cost pricing dynamic as to what you're seeing out there?

I think we are in an environment now -- certainly we are planning for almost continual price increases season-on-season, year-on-year. So at the moment, we have got some moderation in oil, in cotton, in rubber. On the other, the Yuan in China continues to appreciate, at albeit 5% or 6% level. But who knows what the government is going to do there. And you have labor prices continually on the rise in China and other countries that have a developing middle class.

So we are operating under the assumption that prices are going to continue to go up next season and they are going to go up the next season after that. And we are doing a lot of things, as you know, looking at new countries and new factories, reengineering our product, putting in new product collections, such as Barefoot, with higher margins. And then when we have to taking selective price increases to address the situation.

It is a little early really to give you a precise estimate as to next year, but I wouldn't be surprised if the first half of next year is less than the first half of this year, for example.

In terms of the year-over-year increases.

Yes, year-over-year increases. So it is something that is going to be here and it's going to be here for some period of time, I believe.

Okay, that's helpful. And then on the investments you guys are making, I guess specifically on marketing, just remind us -- I think marketing was up like 16% first quarter. What was it up in the second quarter and what is it as a percentage of sales? What are we looking at at this point?

It is 4.2% of sales. Our problem, quote, unquote, is that our revenue growth has been so strong, it has been difficult to get our marketing spend as a percent of revenue up higher. It was 4.2% in the quarter and year-to-date compared to the same 4.2% last year in the quarter and year-to-date. And the question -- what was advertising and marketing up in the first quarter?

Yes. What was it up in the first -- or first and second quarter, what was it up in terms of dollars?

In terms of dollars, it was up $2 million in the second quarter. And hang on a second -- let me do my math here on my calculator, on a year-to-date basis. Up $3.9 million year-to-date.

Okay. All right. And then just last two things real quick here, just on brands. Cushe, in terms of the growth that you are seeing, maybe just talk about domestic versus international doors you are getting into, channels, things of that nature.

And the other second question here, just on the Merrell and the Barefoot running, great success in the outdoor specialty, the REIs, MSs, et cetera. How are you doing in the more -- in the larger sporting goods channels, department store channels, in terms of generating growth there?

I will take the Merrell Barefoot thing. As I said earlier, when you are in more of a sit-and-fit environment, Barefoot is really outperforming. The entire concept, which needs a little explaining, some probably education at the sales force level, it is not quite performing at that level in more of a self-service environment or a big-box environment -- that would include some of the department stores, although I'll except Nordstroms from that category -- and some of the sporting goods channels.

So they know it is coming; so the big-box athletic guys, the sporting goods stores know that the trend is coming. They are sticking by -- certainly by Merrell Barefoot and probably a few other brands. But certainly clear outperformance in outdoor specialty running shops and the REIs and Nordstroms of the world.

With respect to Cushe, as you know, we acquired that brand when it was -- had very low pairage. And we're looking for that brand to increase 60% to 100% every year, year-on-year. The product, as you know, is just spectacular. The brand had a strong triple-digit increase in Q2. We already have it, because of our international distribution, in 88 markets around the world. It is men's, it is women's. Right now, about 50% of all pairs, for example, would be at independent retail, maybe around 20% in department stores.

We have some very strong international programs with distributors that are just getting going. So it is the sandals, it is the surf slippers, it is the boutique sneaker. And to have its Shucoon product win Best in Show at Pitti in Italy is quite an accomplishment for a relatively -- currently a small brand, but one that we have big growth plans for.

And an additional data point on Cushe in the US, the accounts we sold the brand to in the second quarter were up 75% versus the prior year's Q2 in the US.

Okay, that's helpful. Just one quick follow-up here. When you guys look at the Barefoot running, and when you talk about the big-box, sporting goods, are you going to try to do more point-of-purchase displays? Are you going to have to kind of do something, maybe increase that consumer awareness and frequency and things of that nature? Or I'm just kind of curious what your thoughts are about that as you go into the back half.

Yes. Those have been developed and they are being installed as we speak, wherever we can get them in. And I don't mean to be negative on the big-box performance or some of the more -- a little bit more of some of the more self-service environments. The performance there is really quite good; it is just not quite up to the spectacular sell-through levels at some of the other distribution channels. So we have developed point-of-purchase materials specifically for some of those venues.

Okay. All right. Well, best of luck to you guys. Thank you very much.

Taposh Bari, Jefferies & Company.

Thanks and good morning guys. Don, can you just give us -- I know you gave us some color on the nature of that one-time temporary gross margin hit, and also the ASP contribution. But can you give us any color on I guess product cost, channel mix or FX from the quarter?

Yes, pricing, we actually -- I won't say to our surprise -- we were pleased to see that we kind of got ahead of some of the cost increases with our pricing. I guess when we talked about the impact of higher product costs, there was a bit of a delay in the flow-through cost of sales from some of the product costs.

So we actually had a nice net benefit from pricing versus product cost in the quarter. Our analysis shows our pricing contributed a little over 300 basis points of gross margin expansion. And product cost was a little more negative this quarter than it was last quarter at down 130 basis points.

FX was a small contributor. We talked about the impact from our own manufacturing, which was about all of the net gross margin contraction in the quarter. And then mix, we had a positive contribution from brand mix, but a negative contribution from channel mix. As I said, the net was a net negative of about 200 basis points.

And that timing shift of revenue that I talked about, the shipment to the international distributors, that we had more in Q2 of this year than our internal forecast and we had a slippage last year of that $4.5 million shipment from Q2 to Q3. That tends to be lower gross margin business, so that was a pretty significant contributor to that negative mix on the channel, if you will.

So again, 300 basis points on pricing, negative 130 on product cost, negative mix of about 200 basis points, including the positive brand mix contribution, and FX positive of about 20 basis points, and then the own manufacturing issues of about 85 basis points negative.

Got you. That is very helpful. So I think just to follow up on the previous question about kind of the cadence of that price versus cost spread into 3Q and 4Q, I think you had mentioned that is going to narrow in 3Q. Should it continue to further narrow in 4Q or are they going to be about the same in the second half?

A little more narrowing in Q4, if our numbers are that precise. And we are talking about things that can change things 20 or 30 or 40 basis points one way or the other. But according to the schedule I am looking at -- and I know there is a lot of work that goes behind it -- a little bit more narrowing in Q4 than Q3.

Got you. So as we think about the flat gross margin guidance for the year, it sounds like the spread of price versus cost continues to narrow, that temporary hiccup in the second quarter goes away. And then it sounds like channel mix starts to kind of work in your favor in aggregate for the second half, and then you have the favorable LIFO charge. Is that kind of the way to think about it?

That's correct. Channel mix will start to work in our favor. Favorable LIFO impact in Q4, we anticipate. And then the foreign exchange, the forward contracts maturing in Q3 at the more favorable rates that will benefit in the fourth quarter, that is a pretty significant contributor to gross margin in the fourth quarter.

Okay. And then just a quick follow-up. I know Blake, you had mentioned that Barefoot contributed about a third of the pair increase in the second quarter. And I think you had mentioned that Merrell was up strong double-digit outside of the Barefoot collection in the first quarter.

So just trying to get an understanding of, without maybe getting into specific numbers, what the contribution of Barefoot looks like as we enter the second half of the year. I know you are expanding the collection there. Should we expect to see a greater contribution from the Barefoot collection to total sales growth in the back half of the year to the Outdoor Group?

Well, that is a lot of detail. It is really hard to say right now. We would expect Barefoot to still be significant, but we also expect Merrell to continue to show progress across its other product categories.

The reason we use the pairage number for Barefoot is, you have to remember, as you know, most of our international business is only done on a royalty basis. So the best way to view the contributions of Merrell Barefoot isn't from a revenue yarn just, but kind of from a pairage. And right now, it is starting to gain traction in other global markets.

Expanded product lineup to push in the fall, but an even more expanded product lineup in spring 2012. Once we actually saw how successful Barefoot was in terms of orders and sell-in in spring 2011, we certainly made more of an investment behind it for spring 2012.

We have talked about the expanded lineup for the fall, the soft-shell product, the Gore-Tex product in the men's side. What you won't have in the fall, you will miss some of the pipeline fill that we had in the spring. So in terms of the contribution to back-half revenue growth versus the first half, expanded product-line but a little bit less of the pipeline fill.

Great. And then just a final question I wanted to ask you guys about the kind of change in competitive landscape, with VF planning to acquire Timberland, which I believe is a pretty large competitor of yours.

So just wanted to get an understanding of how you are kind of thinking about the competitive landscape with that brand kind of going under the VF corporate umbrella, how that changes the way you are kind of looking at the Merrell strategy longer-term. And maybe if you could just talk about the overlap between those two brands, if I am correct in that assessment. Thanks.

Well, you know, we don't like, frankly, to talk about our competitors. I would say VF has a history of when they acquire a bigger business of letting it run independently. So Timberland was a tough competitor before, it is going to be a tough competitor afterwards, and we are a pretty tough competitor. So we will be knocking heads.

Appreciate the color. Best of luck.

We are showing no further questions, so at this time we will turn the call back over to Ms. Cowdin.

Okay, thank you very much, Andrew. On behalf of Wolverine Worldwide, 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, and that replay will be available through October 2, 2011. Thank you.

This concludes Wolverine Worldwide's second-quarter 2011 earnings results conference call. You may now disconnect.