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Wolverine World Wide, Inc. (NYSE:WWW)

Q4 2007 Earnings Call

January 30, 2008 8:30 am ET

Executives

Christi Cowden – IR

Blake Krueger – President, CEO

Steve Gulis – Executive VP, CFO

Analysts

John Shanley – Susquehanna International Group

Robert Drbul – Lehman Brothers

Jim Duffy – Thomas Weisel Partners

Jeffrey Edelman – UBS

Mitch Kummetz – Robert Baird

Todd Slater – Lazard Capital Markets

Robert Samuels – JP Morgan

Jeff Blaeser – Morgan Joseph

Sam Poser – Stern Agee

[Jay Saul] – Morgan Stanley

Operator

Good morning and welcome to Wolverine World Wide fourth quarter and fiscal 2007 year end earnings conference call. (Operator Instructions) I would now like to introduce Ms. Christi Cowden, Director of Investor Relations. Ms. Cowden you may proceed.

Christi Cowden

Good morning everyone and welcome to our fourth quarter conference call. On the call today are Blake Krueger our President and CEO and Steve Gulis, Executive Vice President and CFO. Earlier this morning we announced record fourth quarter and fiscal 2007 year end results. If you did not yet receive a copy of the press release, please call Lizzie Neinheitz 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 predictions and projections made in today’s conference call regarding Wolverine World Wide and its operation 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.

Blake Krueger

Good morning and thanks for joining us today. It was a great year for our company and I’m pleased to report record revenue and earnings for our fourth quarter and fiscal 2007. This marks our seventh consecutive year of record revenue and earnings per share. Our record financial performance is a testament to the consistent execution of or long standing business model. This model is focused first and foremost on marketing our portfolio of eight powerful lifestyle brands. Second leveraging our global reach which already extends to 180 countries. For 2007 well over half of our profit was generated offshore. Third expanding our diverse distribution strategy which is focused on exciting a variety of global consumer groups in multiple retail channels. This operating model and our team’s rigorous execution against it enables us to consistently post great results even when we face difficult macro economic headwinds in a particular country or region.

Revenue for the quarter of $357.4 million increased from the prior year by 4.6% and revenue of $1.199 million for 2007 increased 5%. You would have thought we could have got that last million. Anyway, our 2007 results included a revenue reduction of about $40 million in our transition businesses, that’s Slippers, Stanley and Private Label and expected lower sales to the department of defense and lower leather demand. Q4 earnings per share of $0.49 were up 16.7% from last year’s $0.42. Earnings per share of $1.70 for 2007 were up 15.6% from the $1.47 reported in 2006. At year end inventories were down 10%.

I am very pleased with our fourth quarter and 2007 results which were achieved despite a challenging retail and economic environment. Our year end backorder backlog was up nearly 10%. We believe 2008 will be another great year for the company and we are increasing our 2008 earnings per share estimate to a range of $1.80 to $1.88. I would now like to begin my operations review with the Hush Puppies Company which achieved both revenue and earnings increases for 2007.

Hush Puppies’ revenue for the quarter declined slightly due to our planned exit from the low margin slipper business. Strong growth in Europe, International and Canadian businesses caused revenue to increase at a high single-digit level during the quarter but lower shipments in the slipper business offset the overall Q4 increase for the group. For the full year Hush Puppies’ global revenue increased about 2.5%. Lower revenue in the slipper business offset the overall 2007 increase by approximately 50%. Earnings for the quarter increased at a solid double-digit rate fueled by a 280 basis point increase in gross margin. Earnings for the year also increased at a strong double-digit rate. The Hush Puppies’ international licensing business had another strong quarter and year with double-digit increases in both revenues and earnings. Thirteen new Hush Puppies concept stores were opened in the quarter including our first two Hush Puppies concept stores in India. There are now over 1,050 Hush Puppies concept stores and dedicated shop in shops operating around the globe.

The Hush Puppies Canadian division also had a strong performance with high double-digit earnings increases for the quarter and the year. Revenue increased at a strong double-digit rate for the quarter and very close to a double-digit increase for 2007. Strong double-digit revenue and earnings increases were also achieved by Hush Puppies UK for the quarter and the year. This was the sixth consecutive year of revenue increases for this business. Brand performance has been strong and better [grade] fashion multiples such as shoe, who sold over 100,000 pair of Hush Puppies at retail last year.

In the US sell through on fall 2007 Hush Puppies product was solid, substantially stronger than last year but Q4 revenue declined. In part this was the result of our decision to separate the soft style business from Hush Puppies and a conscious decision to reduce inventories to limit our risk at retail. We ended the year in the US with 33% less inventory than last year. We were pleased with our customers’ response to the fall 2008 Hush Puppies collection at the Fanny Show in New York where we also introduced the new Guess Designer Series as part of our 2008 50th Birthday Celebration. It’s hard to believe that the Hush Puppies brand will be 50 years old this year. The product was designed by celebrity stylist Philip Block from New York and Rachel Fanconi from London. It was another solid year and quarter for Hush Puppies. This marks the sixth consecutive year of revenue increases and the 24th straight quarterly earnings increase for the brand.

The Heritage brands group which includes our two largest licensed footwear businesses, Caterpillar and Harley-Davidson, also had a solid year with revenue up in the mid single-digit range. In spite of tough trading conditions and the decision to refocus the distribution of Harley-Davidson footwear in the US, the group achieved a slight revenue increase in the fourth quarter. 2007 earnings for the Heritage brands group were up double-digits with a strong performance in the fourth quarter. This earnings gain reflects continued gross margin expansion, about 120 basis points and timely operational controls to offset difficult retail conditions in certain territories. As a result 2007 represents the fourth consecutive year of strong profit gains for the Heritage brands group.

For CAT, full year growth was driven by another explosive year in the international markets which grew by over 35% in pairs and in the US market we also achieved a double-digit growth. Revenue was down slightly in our European operations for CAT. Positive momentum for the CAT brand has been driven through continued focus on strong integrated product marketing concepts including [eye] technology, which has now shipped well in excess of 2 million pairs to the market since its launch. And the legendary [raw] collection which has helped position the brand to the younger consumer and better grade distribution. We also continued to focus on taking market share in the work category. Dedicated shop in shops also contributed to 2007 growth as CAT opened 180 new locations during the year. An increase of almost 40%.

Harley-Davidson continues to deliver against its goal of expanding distribution outside the US showing positive momentum in Canada, Europe and in international markets. For Harley-Davidson a refocus on true performance product for the rider and appropriate fashion forward brand collections in vulcanized and skate inspired product have refreshed the footwear offering and have been well received. Overall it was another good year for the Heritage brands group. That group this year delivered a profit increase that was almost three times the rate of its revenue growth.

Turning to the Wolverine Footwear Group, revenue was down as planned in the mid single-digit range for the quarter and the year. As lower sales in certain transition businesses, that’s Private Label and Stanley, and lower planned sales to the Department of Defense had a negative impact on top line growth. The core Wolverine Boots and Shoes business posted a low single-digit revenue increase for the year and this was done in part due to a significant increase in the mobile distribution channel where we are taking market share with a multi brand offering of great work product. Revenue in the Wolverine Footwear Group exceeded planned for both the quarter and the full year.

The Wolverine brand continues to focus on delivering great new product and the new comfort technology program, Contour [Whelp] was launched in the fourth quarter. Initial sell throughs have been very good for this premium priced product. The brand’s commitment to product innovation was once again recognized by the retail community as retailers polled by one of the industry’s leading trade publications, voted Wolverine Boots and Shoes the winner of the Design Excellence Award in the work boot category for the ninth consecutive year. The base business continues to be recognized by the military for cutting edge product innovation as we developed highly technical solutions that led to contract awards for elite military units such as the Special Ops Forces.

The Bates civilian uniform and international businesses grew at a strong double-digit pace for the year and frankly we expect that growth to continue into next year. The Wolverine brands and the Bates brands continue to have incredible consumer brand loyalty and are recognized as the gold standard in their respective categories. The Outdoor Group which consists of Merrell, Patagonia Footwear and Sebago Brands had an excellent quarter. Q4 sales for the group were up over 17% with Merrell contributing a significant majority of the increase. The group achieved excellent leverage as earnings in the quarter were up almost three times the rate of the sales increase. 2007 was another great year for the Merrell brand and the global momentum continues with overall revenue up at a strong double-digit pace. Sales were significantly higher than last year in all regions. We expect Merrell to have another great year in 2008. Merrell’s growth over the last seven years has been driven by superior product and the brand’s extension into new product categories. Today Merrell has a diversified product offering that appeals to men, women and children across a wide range of ages. Merrell continues to dominate the multi sport and trail run categories and the Merrell’s women’s casual product is performing well at retail. And frankly on that product we’ve experienced higher than expected reorders. Sales of performance outdoor product were especially robust in the US. Merrell continues to rack up industry and retail awards as the brand received the Footwear News Brand of the Year Award in December. More recently Merrell’s consumer appeal was again confirmed by the retail community which voted Merrell the winner of The Design Excellence Award in the outdoor category for the seventh consecutive year. The affinity of the Merrell consumer and the intent to repurchase is the highest for any footwear brand and that’s athletic or casual as reported by MPD market research. The global retail presence for Merrell also continues to grow. The Merrell store count grew by 46% last year to 41 locations at year end. We expect the store count to approach 100 by year end 2008 as new footwear offerings coupled with Merrell Apparel and Bags will enable our global partners to accelerate the opening of Merrell stores. In 2007 we opened three company-owned stores in North America including Whistler, Canada, home of the 2010 Winter Olympics. We also ended the year with over 450 dedicated Merrell shop in shops around the world.

In the first full year of business Patagonia Footwear captured the essence of the brand and we delivered products that met the expectation of the brand’s core consumers. Distribution was achieved this first year with leading retailers in over 30 countries and we expect the international business to build in the future. Strong sell through, especially in men’s led to increased door expansion after initial testing with key US and global retailers. Patagonia achieved some notable highlights in Q4 where sales of the men’s line in our Track ‘N Trail stores accounted for 10% of all footwear sales during the last month of the year. The sales increase was driven by a strong reaction to the new fall ’07 line. Strong sell through in our test with REI saw the men’s line expand from two to 20 doors. While the women’s business remains an opportunity reaction to the fall ’08 line has been very good.

Sebago had an excellent year strong 20% plus revenue increases in the fourth quarter and the year and even stronger increases in the US and Europe. The enthusiastic consumer and retail response was across all categories including marine, dress casual and kids. Sebago ended the year with 25 retail stores and 68 shops in shop installations. Women’s product this year was well received as the Sebago Women’s business grew over 50% in 2007. We continue to view this 62 year old iconic American brand as a strong growth driver for the company. The Outdoor Group continues to be the company’s largest generator of revenue and earnings and had a very strong 2007.

Overall we are very pleased with our performance this year and are encouraged by the momentum in our business going into 2008. We view the current macro economic headwinds as an opportunity for our business model to shine and frankly to increase our market share. We will continue to take a fanatical approach to product innovation across our eight brands. Our spring product lines were well received and we entered 2008 with our order backlog up nearly 10%. I will now turn the call over to Steve Gulis our Executive VP and CFO who will provide you with additional information about our fourth quarter and year end results along with our updated 2008 projections. Thanks.

Steve Gulis

Thank you Blake and good morning everyone. Today I will review the financial highlights for the fourth quarter and full year 2007 and I will finish my portion of the prepared remarks with insight into the company’s financial goals for fiscal 2008.

We are very pleased with the company’s strong fourth quarter results, especially given the difficult environment which is affecting many consumer product and retail companies. There should be no doubt that the breadth of our business model has differentiated us from many of our peers as we reported record revenue and earnings per share for both the fourth quarter and full year 2007.

Fourth quarter 2007 revenue of $357.4 million exceeded the $341.7 million reported in the fourth quarter of 2006 by $15.7 million or 4.6%. Earnings per share improved 16.7% to $0.49 per share in the fourth quarter of 2007 which compares to $0.42 per share reported in the same quarter of 2006. Strong gross margin expansion and solid expense controls generated this record performance. For the full year 2007 revenue totaled $1.199 million which compares to the $1.141.9 million for fiscal 2006. This 5% improvement was driven by organic growth in our ongoing branded businesses and positive foreign exchange increases approximating 2%. The organic growth experienced in the year more than offset the sales reduction attributable to the Stanley, Private Label, Slipper and certain leather and military contract businesses. These changes reduced fourth quarter and full year 2007 revenue by 3.1% and 3.3% respectively. These reductions were anticipated as we determined that the financial models of these businesses were not in line with the long terms goals of the company.

Revenue growth for the business was broad based with the Merrell brand posting solid double-digit increases for both the fourth quarter and full year. The Hush Puppies, Wolverine, Sebago and Caterpillar footwear brands posted revenue increases for the year, while the Harley-Davidson business was flat as we rationalized distribution strategies for this brand. Overall we were pleased with our revenue performance given the environment which existed particularly in the back half of the year. Record earnings per share of $1.70 for the full year of 2007 compares to the $1.47 per share which was reported for fiscal 2006. Double-digit increases in operating performance were reported in three of the four business groups with the Wolverine Footwear groups operating results being impacted by the eliminations discussed earlier. Additionally we achieved profit improvements in every region of the world contributing to the fifth consecutive year in which the company posted a double-digit improvement in earnings per share.

Operating margins were strong in the quarter and full year as full year operating margin of 11.6% was reported, a 90 basis points improvement over fiscal 2006 results. Strong gross margin expansion in the quarter and full year, 110 and 70 basis points respectively, drove the majority of the operating margin expansion. An expense leverage of 10 basis points was obtained in both the quarter and year on a comparative basis. The gross margin improvement resulted from increased initial pricing margins, strong inventory management programs, improvements in our sourcing and footwear manufacturing operations and foreign currency gains. These improvements were partially offset by increased shipments to international distributors where the business model operates off of lower gross margin levels. These positive trends in gross margin expansion are expected to continue in 2008.

Selling and administrative expenses as a percentage of revenue was reduced to 27.8% for both the fourth quarter and full year 2007. Strong expense controls throughout the business generated the expense leverage. Additionally the business continued to fund its brand building and marketing programs as increased expenditures were experienced in these areas while improvements were generated in other core expense categories. We are continuing to evaluate and implement programs to drive efficiencies, consolidate operations and reduce costs in our global operations and will continue to challenge our overall cost and expense structure in 2008.

For the full year net interest income was up due to the increased cash balances which the company generated during the year. Additionally the company reported an annualized tax rate of 33% for the year and fully diluted shares outstanding were reported at 54.6 million shares. The combination of these factors contributed to the generation of full year earnings per share totaling $1.70 which was an increase of $0.23 per share over 2006 or a 15.6% increase. The company’s balance sheet continues to strengthen with a total debt to total capital ratio of 2.2% and a net cash position of $65.4 million. Our after tax return on assets improved to 14.1%, a 160 basis points improvement and the after tax return on equity improved 190 basis points to 19.1%.

The company’s working capital position was reduced by $41.9 million as we exited businesses which were not meeting our financial goals and strong inventory management programs resulted in reduced inventory levels. Inventories at year end were reduced by $18.3 million or 10% when compared to year end 2006. This was accomplished while continuing to deliver world class service to our customers around the globe. An accounts receivable increase of $27.3 million or 17.9% was reported at year end 2007 resulting from spring shipments being made to three significant customers in international markets during December. Shipments to these same accounts were made in November during 2006 and the cash collection related to these shipments was made prior to year end 2006. Significant cash collections were experienced in the first four weeks of 2008 and our aging of accounts receivable and days outstanding are very strong.

During 2007 we repurchased 4,741,400 shares of Wolverine stock in open market purchases at an average price of $27.38 totaling $129.8 million. While the repurchases were executed at levels above our current share price, the repurchases support management’s belief that the long term value of the company is significantly above its current level. Additionally the company has approximately 3.5 million shares remaining under it’s previously authorized repurchase program and it is the company’s intention to continue it’s active repurchase initiative. In addition to the repurchases, the company paid out annual dividends to its shareholders totaling $18.5 million. In total more than 100% of the company’s net earnings were returned to its shareholders through these initiatives in 2007.

We are entering 2008 with a solid backlog position which approximates 10%. While reorders in the back half of the year were lower than the prior year, retailers continue to make future order commitments for the market right products which are offered by our strong family of brands. Based on our expectations of market conditions in 2008 we are providing revenue estimates of $1.230 million to $1.260 million for fiscal 2008. We are expecting soft retail conditions in the first half of 2008 with a slight pick up in the second half of the year. As noted earlier, we are planning gross margin expansion for 2008. This expansion will be driven by continued weakness in the US dollar, a strong year end inventory position, elimination of under performing businesses and growth in our higher margin businesses. Additionally there should be little, if any incremental impact related to anti dumping duties in 2008. Product cost increases have been occurring as the China economy grows and appropriate actions are being taken to mitigate these pressures.

While we continue to drive further cost control initiatives in the business we are anticipating a slight increase in expenses as a percentage of revenue in 2008. The increases will be focused in brand development, product innovation, marketing and retail initiatives. Corporate and core expenses are planned to be equal to 2007 levels in 2008. We have increased our 2008 earnings per share estimate to a range of $1.80 to $1.88 per share. Included in this estimate is an estimated annualized tax rate of 32.8% which is a 20 basis point improvement over 2007. This reflects continued global growth initiatives where the tax rate is slightly favorable to that in the US. Additionally, our share repurchase program in 2007 and anticipated repurchases in 2008 should drive our fully diluted shares outstanding to the 51 million to 52 million share range.

In closing we are confident in our business model as it continues to drive strong financial performance for the company. While we cannot control the financial marketplace we can focus our efforts on continued execution of our business strategies and if we do so, we feel that the business will receive its proper value and that our long term shareholders will be rewarded appropriately. We are excited about the prospects for the business and look forward to driving consistent growth and financial performance. I thank you for your time and will now turn the call back over to Blake for some closing comments.

Blake Krueger

Thanks Steve. We are obviously pleased to have delivered our seventh consecutive year of record revenue and earnings per share. Our strong business model which is focused on a portfolio of brands, a diverse distribution strategy and a geographic reach expanding to 180 countries permits us to outperform in variety of economic climates. We are able to deliver excellent financial results while investing in new growth initiatives and product innovation and we expect that to continue next year.

We will now turn the call back to the operator so we can take your questions.

Question-and-Answer Session

Operator

Your first question comes from John Shanley – Susquehanna International Group

John Shanley – Susquehanna International Group

Good morning Blake and Steve. Blake can you give us a sense as to how the outdoor business brands are doing specifically in Europe and in particular can you give us an idea of how much Merrell’s global revenues are now being derived from the European sector?

Blake Krueger

I’ve got Steve looking up some specifics John, but we had great growth in Merrell and Sebago in Europe this year. Patagonia, this was the first year for Patagonia, the brand itself had a good presence in a few European countries but not like the United States so we had excellent growth in Outdoor Group in Europe and frankly in many of our other brands as well. And as you know has grown from probably less than 5% of our overall business in 2001 and 2002 to over 20% today and we had a strong increase in Europe this year across all our brands.

John Shanley – Susquehanna International Group

Are the product margins richer in Europe than they are domestically Blake?

Blake Krueger

Not really, they’re right in line with what we do in all of our own territories.

John Shanley – Susquehanna International Group

Okay. Let me ask one other question, the inventory was down an impressive 10% as you noted in your comments and particularly if I heard you correctly the Hush Puppies inventory was down 33%, is that correct?

Blake Krueger

That’s correct in the USA.

John Shanley – Susquehanna International Group

Can you give us a sense of how you’re driving that inventory level down and are you going to be able to still attain the 10%, or be able to support the 10% increase in the forward order levels that you have with that kind of a marked decrease in your inventory position?

Steve Gulis

Yeah John, we’ve been focusing over the last several years of a merchandising strategy which is going narrower and deeper and we continue to sell in and at sell through at the retail level a narrower inventory mix which allows us to drive efficiencies in our overall inventory turns and while we’re servicing our customers appropriately. The fringe products and the fringe SKUs are the pieces that we really are taking action on and if the inventory is not productive, that’s where we’re really evaluating whether it is appropriate to have or not.

John Shanley – Susquehanna International Group

Do you see this process continuing in fiscal ’08?

Steve Gulis

Inventory management processes and efficiency programs will continue forever John and we’ll continue to drive whatever efficiency we can out of the business. Whether we can continue to reduce the working capital investment given the growth I don’t know, but we can gain more efficiency by having any inventory increases which may potentially occur being slower than what our rate of revenue growth would be.

John Shanley – Susquehanna International Group

That’s great to hear. Last question I have, Blake maybe you can comment on the fashion trends that are driving the Hush Puppies business, are there some specific items either on the apparel industry or something else that’s going on that’s helping to increase Hush Puppies business both domestically and internationally?

Blake Krueger

Yeah, I can comment. I think there are a few continuing macro trends around the world. One is the Outdoor and I see that as a trend that continues to build and gain some momentum whether it’s in China or any other region. Another trend is you might call it the green trend, and that kind of relates to Outdoor and feeling good about your relationship with the outside. Hush Puppies for example have had great success with their Harmony collection. That’s an environmental friendly collection; I know you’ve seen it. It’s based on recycled materials; natural materials, comfort and that had a very good response. And that’s premium priced product in the $80 to $90 range for example. That concept is being expanded to men’s as well for this upcoming year. So I think Hush Puppies in the US and certainly in Canada and Europe had some product that was fashion-correct but they’re also developing some big product marketing concepts to drive further growth.

John Shanley – Susquehanna International Group

Great, thank you very much, appreciate it.

Steve Gulis

John, just to answer your first question, the Merrell growth in Europe was the strongest region of the world, it actually exceeded the overall growth so that was very positive and it represents about 20% of Merrell today.

John Shanley – Susquehanna International Group

Thank you.

Operator

Your next question comes from Robert Drbul – Lehman Brothers

Robert Drbul – Lehman Brothers

Two quick questions actually, the first is if you could give any detail around the inventory specifically in the channel of retail and the second question was, within that backlog number how much of that increase was domestic versus international?

Blake Krueger

I’ll handle the first question. I guess kind of take a look at inventory levels. I think to put everything in its proper context, I think most retailers have been working on their inventory levels since mid year last year. So I don’t think anybody has been kind of surprised maybe by the magnitude but the volatility of the market and consumer spending, a little bit of a slowdown. So everybody’s been working on their inventory levels. I would say my impression right now is that it may be a little bit of a mixed bag out there. I think some of the department stores, maybe especially in the mid tier may have more inventory than they might like. I also have a feeling that there’s more athletic inventory out there from store to store than maybe the brown shoe area. But for example the footwear independent and related to that the outdoor specialty independents where we do a big chunk of our business, I think these are smart operators. The best of the best are really left and their inventories are in pretty good shape.

Steve Gulis

And from a backlog perspective, I would tell you that our backlog is well balanced around the globe and that’s one thing that we always look for in our overall business model is balance and diversification and so we’re very pleased with both the balance amongst the brands in our overall backlog and also geographically the balance in our backlog.

Robert Drbul – Lehman Brothers

Great.

Operator

Your next question comes from Jim Duffy – Thomas Weisel Partners

Jim Duffy – Thomas Weisel Partners

Thanks so much, great job. A couple of questions, expense controls, can you give us a little bit more flavor as to what you’re doing there. What are some of the areas where you’re looking to save on expenses and so forth?

Steve Gulis

I think there’s a couple of areas that we’re always looking at Jim and some of it is pure expense controls, other is more efficiencies. Whether it’s in our distribution and transportation initiatives to get product to markets faster and more efficiently, that’s one of the areas that we’re looking at. If we don’t have to take it through a distribution center we can go direct to the customer, that’s a lot more efficient and a lot less costly. In the product development area while we continue to invest, we look for areas of waste that we may have. In our PLM project which we’re initiating we’re looking at areas to reduce cost there. We continue to look at all of our needs from an employee base, our health care costs, our employee benefit costs, areas like that. So there’s nothing that we’re not attacking at this point in time. It’s very broad based and it’s working.

Jim Duffy – Thomas Weisel Partners

Great. And then I’m encouraged by the tax rate guidance, it strikes me that there’s probably more opportunity there. Are there things that you can do such as establishing a presence in lower tax jurisdictions to bring that rate down even further?

Steve Gulis

We continue to look at areas to do that Jim, it’s always a fine balance as to make sure you’re aggressive enough but don’t be overly aggressive to where you get greedy and that’s a tough balance to make sometimes. But I think we are, but if you look at our peer group that we look at I think we rank quite low as far as the percentage and I think we’re in the upper quartile as far as what our tax rate is versus our peer group so we’re already in a very good position but that’s another opportunity we’re looking at, what we’re doing in the Far East and our Dominican Republic and European operations to continue to drive tax efficiencies on a global basis.

Jim Duffy – Thomas Weisel Partners

Great, keep up the good work.

Operator

Your next question comes from Jeffrey Edelman – UBS

Jeffrey Edelman – UBS

Thank you good morning and great job. A couple of questions on international, could you give us a sense how much international overall grew in the quarter, what it represented as a percentage of the quarter and full year?

Blake Krueger

Well speaking of the full year, I think we had growth this year in all regions Jeff. We grew in the United States, but if you look offshore at Canada, Europe and International we had accelerated growth rates in all of those three other regions. I haven’t done a mathematical total up but we had double-digit growth in Europe, close to double-digit growth in other international markets and upper single-digit growth in Canada for example. Our growth was really spread amongst our brands and really across all regions.

Steve Gulis

And specifically to the fourth quarter Jeff, our overall revenue mix internationally was a little bit lower than our 40%, it was around the 35%, but that is expected to be that way because in the fourth quarter we traditionally have stronger US shipments especially in some of our work and other, our other utility businesses, so our overall mix for the full year continues to be very balanced and solid.

Jeffrey Edelman – UBS

Okay and then I believe you mentioned currency helped you about 2% for the year in terms of sales. Was it similar in the fourth quarter or a little less because of the mix?

Steve Gulis

It was just about the same for both the full year and the quarter.

Jeffrey Edelman – UBS

Okay and then the gross margin impact from FX, was that significant?

Steve Gulis

It was about 50 basis points for the full year so it was a positive move for us but we feel that we had strong improvements in other areas of the business also with our inventory management programs, the fact that we got out of lower margin businesses and some other initiatives so it’s not all coming from FX.

Jeffrey Edelman – UBS

Right okay and then finally thinking about the first half of the year with orders up 10 inventory down 10 are the orders more weighted towards the end of the first half and you talked about a soft first half environment, pick up in the second half, would we expect your own trends to follow a similar pattern?

Blake Krueger

Yes I think so. If you looked at our kind of a break up rough break up, of our order backlog we feel very good about our current position and our year end position, it probably is more heavily weighted to Q2 for example than Q1 right now. We’re just expecting conditions to be a little bit tougher in the first half of the year, that’s probably consistent with many companies across the board out there.

Jeffrey Edelman – UBS

Would this imply that all of the earnings would be generated in the back half of the year?

Steve Gulis

No, no.

Jeffrey Edelman – UBS

Okay. Fair enough thank you.

Operator

Your next question comes from Mitch Kummetz – Robert Baird

Mitch Kummetz – Robert Baird

Congratulations on the quarter. I’ve got a few questions, let me start, I think the comment was made early in the call that businesses and transition were about a $40 million sales hit to the year, what about new businesses, both Patagonia and Merrell Apparel, what did they contribute from a top line stand point for the year?

Blake Krueger

I would say those businesses were around $15 million to $20 million in total.

Mitch Kummetz – Robert Baird

Okay and what is the expectation for businesses and transition and new businesses in ’08, what’s assumed in the guidance there? I think at one point you guys were saying that some of these businesses and transition begin to normalize in ’08, is that still the expectation?

Steve Gulis

We’re still going to take about a 1% hit to our growth on those businesses in ’08, Mitch.

Mitch Kummetz – Robert Baird

Okay. But the combination, if you kind of net net the two together it should be less of a sales drag in ’08 than ’07 correct?

Blake Krueger

Yes, that’s correct. That’s what we’re planning.

Mitch Kummetz – Robert Baird

Okay and then Steve on the backlog I think you had said that you look for a balance across the businesses, the brands, but I assume that when you look at that near 10% backlog you increased by Merrell’s up double-digits, are there any other brands within the portfolio that are up double-digits and should I assume that all the brands are up in terms of backlog?

Steve Gulis

I believe, I’m going off of memory here but I believe all of our brands are up Mitch at this point, at year end. The weighting with Merrell’s growth is consistent with your comment, yes.

Mitch Kummetz – Robert Baird

Okay.

Blake Krueger

I think we had, we ended the year with pretty good backlog numbers for the Wolverine brand also and also for Caterpillar.

Mitch Kummetz – Robert Baird

Okay great, that’s helpful thanks. Just a couple of housekeeping items, what were the average shares outstanding in the fourth quarter?

Steve Gulis

In the fourth quarter, for the full year it was 54.6 and for the fourth quarter it was, you’d think I’d know that off the top of my head, 52.8.

Mitch Kummetz – Robert Baird

Okay, 52.8 for the fourth quarter and where do you expect the interest line to go in ’08?

Steve Gulis

That’s going to be primarily driven Mitch based on where our share repurchase activity goes. We ended the year in a net cash position but if we repurchase shares at the rate that we did this year we may end up into the revolver a little more, during the peak working capital period. So the interest cost is expected to go up next year.

Mitch Kummetz – Robert Baird

Okay, that makes sense. That’s all I had, thanks.

Operator

Your next question comes from Todd Slater – Lazard Capital Markets

Todd Slater – Lazard Capital Markets

Thank you very much, a couple of quick questions, how much of the inventory reduction which is terrific by the way year over year, is due to areas that were discontinued or planned down like the slippers or the DOD versus for the continuing areas?

Steve Gulis

I think Todd one of the things you have to look at also is that we’re carrying inventory on the new initiatives which offset a pretty significant portion of that so I think when you look at the overall balance that it really isn’t a core operation of the business.

Todd Slater – Lazard Capital Markets

Okay that’s great. And any issues regarding raw material cost increases that you anticipate for ’08 or ’09?

Steve Gulis

We’re getting some costing pressures out of China, both on the outsold side and on the labor side and we’re working through those issues and we know that that will happen and we’re mitigating whatever we can there and we’re working to improve efficiencies in other areas of our supply chain to offset as much of that as possible. If we need to, we will have to take price increases where appropriate as we have done in the past.

Blake Krueger

I see this year as a year that the footwear industry is going to have some price increases probably across the board. The truth is the cost and expenses in China are going up for the footwear factories there. The fact is that the world still makes most of its footwear in southern China, 86% of all footwear consumed in America today comes from China so that’s going to move anywhere anytime quickly. I think whether you’re in the athletic or brown shoe arenas you’re going to see some pricing pressure this year and some product cost increases.

Steve Gulis

The one positive that is happening in that area though Todd is leather prices seemed to have stabilized and actually have contracted a little bit so some of the pressure that we had there in ’07 has been eliminated.

Todd Slater – Lazard Capital Markets

That’s great, so it sounds like there’s some offsets and then with respect to your ’08 guidance, I’m just wondering what presumptions you might be making relative to the dollar and FX in that range?

Steve Gulis

Well one of the things that we’re fortunate on, if you want to call it fortunate I don’t know if that’s the right word, but we actually because of our product orders that we have on plan we have a significant amount of our contracts already hedged with forward currency contracts probably about 60% of our requirements are already contracted. So the first half of the year, we’re pretty well locked into knowing what our exchange rates are going to be for the product that’s going to be going into Europe and Canada. So we’re in good position on that and the fluctuation of the dollar will have an impact on the back half of the year. But there again, we have time to price our product appropriately if the dollar all of a sudden strengthens quickly, we’ll know what our product cost out of China is going to be and we can price our product accordingly at wholesale to protect our initial pricing margins.

Todd Slater – Lazard Capital Markets

Great, so what you’re saying is it’s pretty much all hedged, the exchange on the dollar is not going to change your outlook.

Steve Gulis

That’s correct.

Todd Slater – Lazard Capital Markets

Great, thank you.

Operator

Your next question comes from Robert Samuels – JP Morgan

Robert Samuels – JP Morgan

Can you talk a little bit more on your own retail strategy and just give us an update on where you are with some of your formats and plans for this year?

Blake Krueger

Sure I would, I think we all know that this was a challenging year for retail footwear at least in the United States, FDRA their comp store numbers were down about 2% this year, which is the toughest year in the last five or six or seven years. Our own retail business had comps this year that were almost 3% positive. We currently have around 72 outlet stores and those stores like everybody’s outlet stores suffered a bit this year from lower traffic counts. Everything was on sale in the department stores and gas prices were high so traffic counts were down there. Our Track ‘N Trail stores we have 17 of those currently, they had a very good year. They had a double-digit comp store increase for the year so in this environment that was pretty impressive performance. Our ecommerce business which is a growing business for us was up almost 40% for the year. So we’ve opened just in the last quarter or so, three Merrell stores for example, company owned Merrell stores including the one I referenced in Whistler, they’re all performing over plan so when we step back and look at retail, we view it a couple of different ways. One we view it globally and we’ve got great partners around the world and most people today don’t realize we have up close to 400 stand alone Hush Puppies stores around the world. So our retail presence on a global basis is large, almost 3,000 dedicated points of sale around the world. Here in the US though, and the way we report retail, retail is only about 5% of our sales. We see a growth opportunity here for a company like us with our portfolio of brands in the mid term and a little bit longer. That should be at least double. We plan to, next year, open full concept stores, maybe a few Track ‘N Trail stores, but we’re going to focus on Merrell stores and the Merrell opportunity next year at least domestically. But the Merrell stores we expect on a global basis to approach 100 by the end of next year.

Robert Samuels – JP Morgan

Great thanks.

Operator

Your next question comes from Jeff Blaeser – Morgan Joseph

Jeff Blaeser – Morgan Joseph

Good morning, thanks for taking my call. Have you seen any purchasing changes or patterns given the construction market and then of your entire product line, which do you believe is to be relatively resistant or potentially vulnerable, probably a strong word, but to a possible US slowdown?

Blake Krueger

You know it’s hard to really say, for instance, our high test business which is our mobile distribution business in kind of the work industrial category had a great year. The Wolverine Boots and Shoes business here premium priced product on the US had growth this past year. We try not to be overly concerned with macro economic conditions. Frankly the footwear industry is a little volatile than some other consumer products industry. If you have superior products, if you stay focused on delivering a great product to the consumer you’re going to do good in tough times and in great times. So we don’t see any significant slowdown in the construction industry or any other particular industry as having any kind of a significant impact on our momentum.

Jeff Blaeser – Morgan Joseph

Okay great and on the Merrell apparel side, maybe too early to say, any update on some of the line adjustments and initiatives that you mentioned last quarter in terms of retail acceptance or on that nature?

Blake Krueger

Sure, we remain as excited as ever about the opportunity for Merrell Apparel. We think its one of the keys for us in helping to create our first billion dollar brand. We probably could not have picked a tougher year to introduce apparel than this past year so in that respect, our conservative approach I think was very, very good. As you know we’ve aligned the new lines in apparel, we’ve aligned it closer to the footwear. We’ve made the apparel little bit more outdoor athletic and performance based. The branding is more prominent. The early reads on that are very good. The outdoor retailer show occurred in Salt Lake City within the past 10 days. The feedback from that, the buzz at the show was very good. We don’t have a lot of hard data at this time, but the reaction to the fall ’07 line was very good. Our presence at Shields is going up, [Dicks] has given us at least 25 doors. We’ve got a test in Gander Mountain. We’re in some of the key independents around the USA, Peter Glen, Blue Ridge Mountain Sports, and Back Country. In Europe, we’re in outdoor specialty shops like Blacks and Field and Track and Snow and Rock and Decathlon, so it’s starting out small. We’re going to grow it the right way. But it’s going to be one of the key success factors to really accelerate the opening of Merrell branded stores around the world.

Jeff Blaeser – Morgan Joseph

Okay great, thank you very much.

Operator

Your next question comes from Sam Poser – Stern Agee

Sam Poser – Stern Agee

Great quarter, you talked about the front half being weighted a little softer than the back half for 2008 how will that apply to the margins and the SC&A as well, can we expect the margin acceleration to follow that as well?

Steve Gulis

No I think the margin improvements Sam are irrespective of what’s going on in the environment here. I think that given that our inventory positions are very strong we feel that our exposure to close outs or mark downs are fairly limited. Our inventory management programs, the things were doing to improve our margins overall should occur in the first half of the year as well as the back half of the year. I think our comment on the softness that we think in the first half of the year is primarily the retail environment we’re working in and through, not necessarily on where it’s going to hit our gross margin opportunities.

Sam Poser – Stern Agee

Okay and then you mentioned on the China pricing that you were taking the necessary steps to do what you had to do but at the same time prices may go up and some of your core business, and with the inventory so low you have some replenishable businesses with some of your Wolverine products and so on and so forth, how do you adjust for that if the prices go up in three months and you’ve already established pricing within a season?

Steve Gulis

Well it’s a process Sam that we’re looking at staying flexible, looking at alternative sources of supplies. It can be in different regions, it can be in Vietnam, it can be in India, we’re constantly looking at reengineering product not to take any quality out of the product but to reengineer the product to address some of the cost concerns and that’s an ongoing process for us.

Sam Poser – Stern Agee

And what percentage of your production right now is China?

Steve Gulis

The Far East is probably 80% and a piece of that is Vietnam so it would probably be 65% to 70%.

Sam Poser – Stern Agee

And the other 20%?

Steve Gulis

Some of it is India, some of it is Dominican Republic, a little bit of it coming out of Brazil, Michigan, all of our military product is bottomed here and required to be made in the US. So we have a different mix because of that portion of our business also.

Sam Poser – Stern Agee

And if you’re looking ahead would you look ahead to see that China, with all the things going on there, go down to like 50%?

Blake Krueger

Well I think yes, we’ll get to 50% for us and the rest of the footwear industry some day, but I think that’s going to be a long process. The world has spent the last 20 years concentrating the vendors, the supplies, the factories in southern China and that kind of migration is not going to happen over night.

Sam Poser – Stern Agee

Where do see the biggest opportunity for the next place, where are you looking most carefully?

Blake Krueger

Well I think we’re staying as flexible as we can. Obviously a lot of the factories and brands are looking at India but some are looking at, a lot of people are looking at Vietnam and any number of other countries.

Steve Gulis

I think our Dominican Republic facilities could be a great resource for us long term also Sam.

Sam Poser – Stern Agee

Great, congratulations again.

Operator

Your next question comes from [Jay Saul] – Morgan Stanley

[Jay Saul] – Morgan Stanley

Just had a question, you mentioned that you thought the environment that we’re seeing now could present an opportunity to take share, can you tell us more about that, what brands in the portfolio do you think have the best opportunities or maybe what categories in general is there an opportunity to take share in?

Blake Krueger

We always believe we have opportunities in all of our brands and in our industry you better have a fanatical focus on product because product is king and if you’ve got great product, you’re going to do well even in tough times. The Design Excellence Awards that the Wolverine brand received for the ninth year and Merrell received for the seventh year are just a couple of the indications of the investments we’re making in product innovation. So I mean really for us we view all of our brands as having growth potential in these times.

[Jay Saul] – Morgan Stanley

Okay, thanks a lot.

Operator

At this time we have no further questions; I will now like to turn the call over to Ms. Christi Cowden.

Christi Cowden

Thank you. On behalf of Wolverine World Wide, I would like to thank you for joining us today and as a reminder our conference call replay is available on our website at www.wolverineworldwide.com. The replay will be available through Wednesday, February 13, 2008. Thanks and good day.

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Source: Wolverine World Wide, Inc, Q4 2007 Earnings Call Transcript
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