Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Christi Cowden – Director, Investor Relations and Communications

Blake Krueger – Chief Executive Officer and President

Don Grimes - Senior Vice President and Chief Financial Officer

Analysts

Scott Krasik - CL King

John Shanley – Susquehanna Financial

Kate Mcshane – Citi Investment Research

Mitch Kummetz – Robert W. Baird

Todd Slater – Lazard Capital

Jim Duffy – Thomas Weisel

Jeff Blaeser – Morgan Joseph

Heather Boksen – Sidoti & Company

Jeff Mintz - Wedbush

Wolverine World Wide, Inc. (WWW) F3Q08 Earnings Call October 1, 2008 8:30 AM ET

Operator

Welcome to the Wolverine World Wide third quarter 2008 earnings conference call. (Operator Instructions) I would now like to introduce Christi Cowden, Director of Investor Relations and Communications for Wolverine World Wide.

Christi Cowden

Welcome to our third quarter conference call. On the call today are Blake Krueger our CEO and President and Don Grimes our Senior Vice President and CFO. Other members of the Wolverine management team are sitting in as well.

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

Before I turn the call over to Blake Krueger to comment on our results, I would like to remind you that the predictions and projections made in today’s conference call regarding Wolverine World Wide and its operations may be considered forward looking statements by securities laws. As a result, we must caution 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

I am pleased to report our 25th consecutive quarter of record sales and earnings per share. Once again our multi-brand, multi-country, multi-category business model enabled us to post record results. Our 50 years experience in building brands around the world serves us well in these challenging economic times. We currently have the advantage of servicing many different consumer groups in approximately 200 countries around the world.

Our sales growth in the quarter was driven by the exceptional top line performance of the Outdoor Group, especially the Merrell brand. Our International businesses also had an especially strong quarter. Asset management and SG&A leverage were also very good as we improved all key operating and balance sheet metrics. Overall, we are very pleased with our performance in the quarter and have increased our 2008 earnings per share estimate.

I would like to begin my brand review with Hush Puppies. We had excellent growth in our international business in the quarter up almost 30% but this was offset by slightly lower sales in Europe and larger declines in the US and Canada. As a reminder we include only the license fee income in reported revenue for the international business. Overall Hush Puppies posted an 11% sales decrease in the quarter which includes the impact of our exit from the Hush Puppies slippers business.

Soft retail conditions, some factory product delays and the bankruptcy of a significant US retail customer contributed to the lower sales in the quarter. The global Hush Puppies business which is 50 years old this year is strong and will exceed 19 million pairs in 2008. One of our key strategic goals is to expand our already large base of controlled distribution around the world for this brand.

During the quarter our global partners opened 19 new concept stores and over 120 shop in shops bringing the quarter end total to 479 stores and 840 shop in shops. China alone added 55 shop in shops in Q3 bringing its total to over 200. While this was a challenging quarter in the US and Canada Hush Puppies continues to perform very well in international markets reflecting the global strength of this 50 year old brand.

The Heritage Brands Group which includes Sebago as well as our two largest licensed footwear businesses Caterpillar and Harley-Davidson reported flat sales in the quarter. For the group, strong double digit sales in the US, Canada and international markets were offset by challenging conditions in Europe. The Heritage Brands Group achieved excellent leverage in the quarter with significant increases in operating profits.

The CAT brand continues to make very good progress in the US with sales in the mid single digits. Canada also had a very good quarter with sales up double digits and international once again posted a very strong double digit increase. These increases were fueled by new innovative products in the rugged casual line and the new super duty extreme work collection.

Harley-Davidson achieved a double digit sales growth in the quarter with the US and Canada posting strong double digit increases. The Vulcanized Garage Collection and the new Premium Performance Riding Boots performed well in all key markets.

Sebago had a single digit revenue decrease in the quarter as very strong double digit growth in the US was offset by lower sales in international markets. Strong demand for the classic Docksides Marine product as well as the new Officers and Lites collections drove the growth in the US. Overall, while Q3 sales were challenging in Europe the Heritage Brands Group delivered solid revenue growth in other markets and very strong operating results.

Turning to the Wolverine Footwear Group, revenue for the quarter declined in the mid single digit range as planned primarily due to declines in private label and Stanley businesses that we are exiting this year. This was offset by growth in Bates and Hytest. Product innovation remains the growth lever for the Wolverine, Bates and Hytest brands.

In the quarter the Wolverine brand continued to succeed with the premium priced Contour Welt collection. Since its introduction this product has sold nearly 200,000 pairs at retail at price points of about $120 to $140 per pair. The Wolverine brand and our own company, by the way, is 125 years old this year and continues to hold the number one position in the premium US work market.

The Bates business remains committed to bringing innovative footwear solutions to all branches of the US Military and continues to supply cutting edge product to the Special Operations Forces. During the quarter the Bates Civilian business introduced and delivered a revolutionary patented comfort technology as ICS or individual comfort systems. This new technology has been broadly accepted by both retailers and consumers and the early sell throughs at retail have been excellent.

The Wolverine, Hytest and Bates brands continue to enjoy incredible brand loyalty and are recognized as the gold standard in their respective categories.

The Outdoor Group, which consists of the Patagonia Footwear and Merrell brands, had an excellent quarter. Sales for the group were up almost 9% and earnings were up at a strong double digit rate. While Patagonia and the Merrell brands continue with overall revenue up 8.6%. Merrell’s Outventure, that’s its outdoor performance category had a strong quarter and continued to establish the brand as the global leader in the performance outdoor segment.

This category is showing strong double digit increase in 2008 by virtue of its multi-sport, water-sport and hiking offerings. Specifically the Moab, the Intercept, the Water Pro collections are selling very well globally for men while the Siren and Chameleon Arc are programs that are performing well with the female outdoor consumer.

In addition, Merrell launched its road running initiative during the quarter which again positions the brand as a performance leader. This initiative is already starting to gain headway as Merrell recently won running networks best shoe award in the neutral road running category. Merrell’s FUSION, that’s it’s outdoor casual category had excellent success this quarter as new product initiatives reflected the brands foundation of comfort, performance and fit. The entire Encore collection was huge success achieving very high sell through at retail.

The success of the Sports Fashion category especially in Europe continued with the launch of the Circuit Collection. Merrell also continues to do very well in the women’s sandal category. We continue to expand Merrell’s retail presence in the third quarter with store openings in Korea, Peru and the Philippines. The brand opened its first US flagship store in Union Square, San Francisco just about two weeks ago and the initial consumer reaction has been stronger than anticipated.

There are nine new concept stores planned in Q4 including Portland, Oregon, Birmingham, Alabama, Indianapolis, Indiana, and Beijing, China. We expect to end the 2008 year with about 70 Merrell mono branded stores and around 700 shop in shop locations around the world.

Patagonia Footwear sales in the quarter were up double digits and the brand enters the fourth quarter with solid momentum. Steady progress is being achieved in the core North American market and we continue to add international territories. The men’s product has been the center of our initial success at retail with strong sales in the casual category that would include the Honeydew and the Cedar collections and a stronger product offering in the performance category.

The women’s category presents future growth opportunities for us as we see strong selling of the brands casual boots for women this fall. The outdoor group continues to be the company’s largest generator of revenue and earnings. We are obviously very pleased with our record Q3 performance especially in light of the challenging retail and consumer environments in several markets.

We ended the quarter with a positive order backlog as measured in dollars and almost a double digit increase in order backlogs measured in actual pairs. Our record Q3 performance was achieved while improving all of our key asset management and balance sheet metrics. Today we are increasing our 2008 earnings per share estimate to a range of $1.87 to $1.92.

I would now like to turn the call over to Don Grimes our CFO who will provide you with some additional information regarding our Q3 results.

Don Grimes

Earlier today we reported record financial results for the third quarter ended September 6, 2008. Revenue for the quarter totaled $318.9 million a 2.8% increase over revenue of $310.2 million in the prior year. Earnings grew 14.8% to $0.62 per fully diluted share versus $0.54 per fully diluted share for the third quarter 2007.

These results represent the 25th consecutive quarter of record sales and earnings per share growth, a performance of which we are extremely proud especially considering the turbulent economic environment in several key global markets and a resulting impact on consumer confidence and consumer spending. We believe this continued excellent performance reflects the power of our brand portfolio and the effectiveness of our diversified business model.

For the first three quarters of 2008 revenue reached $874.5 million a 3.9% increase over the $841.5 million reported for the first three quarters of 2007. Fully diluted earnings per share grew to $1.41 up 16.4% from $1.21 per share for the same period in 2007. We are extremely pleased that we delivered for our shareholders a rate of growth and earnings per share more than four times the revenue growth rate. Excellent operating leverage driven by gross margin expansion, SG&A discipline and opportunistic share repurchases at favorable prices.

As mentioned earlier by Blake, the 2.8% revenue growth in the third quarter was led by the Outdoor Group and in particular our Merrell brand. A weaker US dollar contributed minimally to the revenue growth in the quarter and was more than offset by the impact of our decision last year to exit the Stanley, Slippers and Private Label businesses.

Gross margin for the third quarter of 2008 was 40.4% a modest improvement over the 40.3% gross margin in the prior year. Similar to the second quarter benefits from foreign exchange and favorable product mix were partially offset by higher product costs from our third party manufacturers and higher freight costs. On a year to date basis gross margin had expanded 58 basis points to 40.3%.

Operating expenses in the third quarter increased 2.3% to $82.4 million or 25.8% of revenue compared to $80.5 million or 26% of revenue in the prior year. We are pleased to have achieved expense leverage in the quarter which was driven by continued financial discipline throughout the business.

Year to date operating expenses are up 4.4% reflecting general inflation and continuing investment in product development and brand support as we balance the need to be disciplined in this uncertain environment with the desire to invest in promising initiatives that we believe will generate superior returns for shareholders in the years to come.

Our effective tax rate was 33.5% in the quarter and we continue to project a full year tax rate of 33.5%. The company repurchased approximately 745,000 shares in the open market in the quarter at an average price of $25.41 per share resulting in weighted average shares outstanding used in the fully diluted earnings per share calculation for the quarter of 50.0 million shares.

Year to date we have repurchased approximately 2.8 million shares for a total of about $72.6 million. We have approximately 678,000 shares remaining under our April 2007 share repurchase authorization and will continue to opportunistically repurchase shares as deemed appropriate by our Board of Directors and Management.

Turning to working capital, our active inventory management programs has helped drive inventories down 2.1% at quarter end to $194.1 million. We believe that our philosophy of going narrower and deeper in our product offering continues to pay dividends as we continue to provide excellent service to our customers while improving our working capital management. We still believe there are further opportunities for improvement that can result in both actual reduction in inventory and enhanced service levels.

Accounts receivable at $240.5 million at quarter end increased 2.1% over the prior year on the 2.8% revenue gain in the quarter. Our net cash position remains solid as ended the third quarter with cash of $74.3 million and total interest bearing debt of $81.6 million of which $70.9 million was drawn from our revolving line of credit.

The company’s seasonal working capital requirements tend to peak at the end of the third quarter or early in the fourth quarter and we expect operating cash flow in the fourth quarter will enable us to meaningfully reduce our revolver balance by year end. Wolverine World Wide continues to have one of the strongest balance sheets in the industry a fact that has served us well in the recent past and will continue to serve us well as we evaluate future opportunities to grow both organically and via portfolio expansion.

Our performance metrics continue to improve. On a trailing four quarter basis the company’s return on assets improved 90 basis points to 14.5% at the end of the third quarter and our return on equity improved 240 basis points to 20.7%. Both of these ratios are at historically high levels. Wolverine is fortunate to have eight brands that compete in about 200 different countries around the globe, thereby reducing the impact of any particular market on our consolidated results.

We are encouraged and pleased that even in an environment of relatively broad based economic turmoil we are raising our full year earnings per share guidance to a range of $1.87 to $1.92 on revised revenue guidance of $1.22 billion to $1.24 billion representing full year EPS growth of 10% to 13%. We expect fourth quarter revenue growth to be more modest then the growth rate we have experienced year to date.

I will now turn the call back over to Blake for some closing comments.

Blake Krueger

We are obviously pleased to have delivered another quarter of record revenue and earnings. Solid execution against our business model allows us to efficiently build global brands, limit risk and gain market share while delivering outstanding financial results in a variety of economic climates. In these times you simply win with superior product. All of our businesses are focused on executing our multi-brand global strategy which at its core continues to deliver new, exciting and innovative product that exceeds the expectations of our loyal consumers in about 200 countries around the world.

Thanks for your time and attention this morning and we’ll now turn the call back to the operator so we can take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Scott Krasik - CL King.

Scott Krasik - CL King

A couple financial question right off the bat in case you addressed it I’m sorry I missed it you had about $800,000 of other income in the quarter what was that?

Don Grimes

That was a gain on the re-measurement of the US dollar based monetary assets in our foreign subs. With the strengthening of the dollar at the end of the quarter we had an inordinately high US dollar balance in our UK and European subsidy this quarter. That was a re-measurement gain that occurred based on the strengthening of the dollar late in the quarter.

Scott Krasik - CL King

You moved some of the debt around so you don’t have show any long term debt at this point it’s all in current?

Don Grimes

Yes, we actually that’s because it’s under the revolver and the part that’s classified as short term is based on our intent to repay over the next 12 months. Its $70 million of the long term debt is a revolver and $10 million is the existing long term debt that will be paid off by the end of the year as well.

Scott Krasik - CL King

Your intent is to get out of the revolver completely?

Don Grimes

Not close the revolver out but over the next 12 months to pay the revolver significantly down.

Scott Krasik - CL King

Maybe talk a little about Merrell, obviously it rebounded from the second quarter I assume you benefited $3 million distributor order and maybe if you could just give a little more color on where you’re seeing the growth in Merrell at this point.

Blake Krueger

Obviously the momentum in Merrell continues at retail. We haven’t really seen in any significant market any evidence of a slow down. The report cards I see from the US customers and sell through reports and the MPD data all indicate that turns are good, sales are good. Merrell is continuing to take market share even in what this year is turning out to be a pretty tough environment for the footwear industry. Maybe not as tough as some other industries out there or some other categories of apparel but still relatively speaking pretty tough for us.

Merrell really is having success both in the performance category, the Outventure category and in the FUSION category but its pretty good news across the board for Merrell.

Scott Krasik - CL King

Your European sub business that’s holding up in line with the company.

Blake Krueger

In Q3 that was very good. As you know there are a few soft spots in Europe right now but that business held up very good in Q3.

Don Grimes

We had some questions in New York a couple weeks ago about Merrell’s sell through and retail, some questions indicating that some data had been seen that indicated Merrell was slowing down and Blake and I were scratching our heads and we came back in mind a significant amount of MPD data and the eight months through August we don’t have obviously through September but in US department store channels based on MPD point of sale data both on men’s and women’s lines Merrell has gained 20 basis points of market share on each of those.

The data that we’re seeing for US department stores indicates that Merrell’s growth continues.

Operator

Your next question comes from John Shanley – Susquehanna Financial.

John Shanley – Susquehanna Financial

Can you give us an idea of the future order numbers particularly for the Heritage and the Outdoor groups?

Blake Krueger

We usually don’t break our future orders down by group but we had pretty good increases across the board. Maybe CAT was a little bit lower but Harley-Davidson has responded well and Sebago has got some good momentum going into Q4 and Q1. We feel pretty good there.

John Shanley – Susquehanna Financial

With all the comments you had about success of Merrell I assume their future numbers are pretty good as well?

Blake Krueger

We try not to break them down but a lot of brands would like to have Merrell’s numbers.

Don Grimes

Across our portfolio Merrell, Wolverine, Sebago, Harley and Patagonia are positive and that’s partially offset by negative backorder positions for Bates, Caterpillar and Hush Puppies.

John Shanley – Susquehanna Financial

Is that primarily because of the European situation?

Blake Krueger

I think the softness especially in the UK market has had a little bit of an impact on CAT.

John Shanley – Susquehanna Financial

The Merrell business as you indicated is doing particularly well in the US. Are the sales results in Europe equivalent to the success you’re having in the US market?

Blake Krueger

The sales results in Europe were at least as good on a percentage basis as the United States. We have not seen Merrell, we have really not seen any significant slow down yet for Merrell in Europe. As a whole our brands are still at this point a bit underserved in Europe. We have a lot of growth opportunity in Europe. The total sales for our brands there is about a quarter billion dollars and greater Europe is the largest better grade market in the world for footwear. We still feel we’ve got lots of growth opportunity in Europe for all of our brands.

John Shanley – Susquehanna Financial

Does that include the UK?

Blake Krueger

Yes.

Don Grimes

As is the case for most of our brands the international markets what we define outside of our owned operations of the UK, continental Europe and Canada and the US tend to have the fastest growth rate because their just operating off of a smaller base typically. Within what we classify as Europe which does include the UK the Merrell growth in the quarter was very strong.

John Shanley – Susquehanna Financial

On the second quarter conference call you had mentioned that you expected SG&A to likely de-leverage in the second half of the year yet it increased slightly in the third quarter. Are there some kind of cost savings or cost reductions or marketing spend reductions that you’re accomplishing in the quarter that may knock it down again in the fourth quarter?

Don Grimes

We’re certainly examining every dollar of operating expense in this environment maybe more so than we would have otherwise. I think coming out of the first quarter the company talked about pretty robust full year gross margin expansion partially offset by some SG&A de-leverage. I joined the company in late May and obviously the outlook on a number of different levels has changed as it relates to factory cost increases.

We’ve been just a little more disciplined on the SG&A side that generated the SG&A leverage in Q3 and we’re going to be as disciplined going forward as we have been in Q3. We’re maintaining our outlook of 30 to 50 basis point expansion in operating margin for the full year and with some gross margin expansion offset by some SG&A leverage for the full year.

John Shanley – Susquehanna Financial

Does it look at this point that you could be leveraging positive in the fourth quarter?

Don Grimes

Without getting into specifics on the fourth quarter we’re going to target the operating margin expansion in that 30 to 50 basis point range.

Operator

Your next question comes from Kate Mcshane – Citi Investment Research.

Kate Mcshane – Citi Investment Research

Would you mind repeating what you said about the backlog number? I think you said in units the backlog was up double digits but in dollars how much was the backlog up?

Blake Krueger

It was up in dollars low single digits. There were a number of factors that impacted the dollar figure this quarter. FX had a pretty significant impact to reduce it. We had lower close outs. We didn’t have the orders from our discontinued businesses. There was some change in the timing of Bates orders. We also saw this quarter again not as dramatic as Q2 but of a shift from future orders to add once orders as retailers were really playing it a little close to the vest watching their inventories very closely and placing more at once orders and fewer future orders.

Those things all impacted the dollar amount. The good news is that our parage backlog was up almost double digit which shows it really reflects a very strong acceptance of our brands around the world. That’s really attributable to a great backlog in many international markets. As you know in our backlog figure for international orders we don’t report the wholesale selling price, we only report the license fee or royalty fee. That gives you a little more.

Don Grimes

On an apples to apples basis the backlog in dollars would be up in the mid single digit range on the unit volume basis closer to double digits, just under double digits.

Kate Mcshane – Citi Investment Research

Can you give us an update on Merrell apparel, does your backlog number include that specific product then what can we expect and what are the retailers saying out the line for this spring?

Blake Krueger

We remain very excited about Merrell apparel and we’re excited because the retail sell throughs this fall have been noticeably better. We’re having some real success across a broad range of retailers. It’s still a relatively small business for us. It’s a business that we’re focused on doing it the right way and not making it large so we’re not so focused on large we’re more focused on what it can do for the brand and how it can help accelerate the opening of Merrell mono branded stores especially in the international market.

You would see it domestically; I would say domestically it’s about 30% of our business. Europe about 25% for example, maybe 30% international and maybe 15% in Canada where it’s also had very, very good success. As you know, we took some steps about a season or two ago to align the apparel closer to the footwear really focus more on that scene between performance and style where Merrell Footwear really operates and make the branding more prominent. We took some actions six months, to nine months to a year ago to really refocus it and it’s showing through in sell throughs this fall.

Kate Mcshane – Citi Investment Research

Did you see an increase in your average selling prices during the quarter and can you remind us how much you expect ASP to increase going into 2009?

Don Grimes

Answering the 2009 question first I guess throughout all of 2009 the prices for fall ’09 are still being worked on and a lot of that is a function of the cost increases that we expect to see coming out of factories. We’re negotiating those so final fall ’09 price lists have not been published. As it relates to average selling prices across the entire portfolio for ’08 we are seeing an up tick in average selling prices because we’re reacting to the increased costs that we’ve been experiencing this year to date.

We’ve been quoting that we’re seeing a 3% to 5% average increase in ‘x’ factory costs this year and we are expecting to see mid single digit increases next year. We will be adjusting prices accordingly and we haven’t seen to the point of your question, we haven’t seen the trade down such that average selling prices on what we’re selling are coming down to offset the price increases that we’re taking.

Operator

Your next question comes from Mitch Kummetz – Robert W. Baird.

Mitch Kummetz – Robert W. Baird

You mentioned that the currency had a negative impact on the backlog could you say what the backlog was in constant dollars? Also, I would imagine that the backlog now there’s a component there of spring ’09 orders could you talk a little bit how those are coming in versus the fall portion of the backlog?

Blake Krueger

I don’t have the constant dollar figures right in front of me but FX in the quarter had at least a two point plus impact percentage point impact on backlog amount just to put it in perspective. It was pretty significant and of course the dollar strengthened at quarter end. We’re continuing to see the same retail reaction in owned markets that we’ve experienced throughout this year. People are in certain markets, the UK, the US concerned a little bit about the economy, little things like are we going to get a bail out plan passed and a few other things that are on their mind.

Our orders for spring are pretty good. Quite honestly as you know, historically the footwear industry has less volatility than many other consumer good product classes. In tougher times, this has been a challenging year for footwear in the US but in tougher times the footwear industry does pretty good, footwear and accessories. They usually come out of it earlier than many other product categories. We’re optimistic about next year.

Mitch Kummetz – Robert W. Baird

Can you talk a little bit about what’s happening at retail right now in terms of inventory levels at retail how clean are they? Tighter credit, how much is that having an impact on some of your customers especially some of the smaller independents?

Blake Krueger

The inventories frankly are pretty good at retail. The retailers that weren’t working on their inventories a year ago have certainly had a year to work on them and tweak them and get used to this consumer environment. In the United States our general impression is that inventories are pretty good. Maybe they’re a little bit heavier at some of the department stores than the independent but the outdoor specialty shops and the independent footwear shops these are tough and smart operators, really the best of the best are left here and they’ve been on this for some time.

We think inventories are pretty good at retail overall for us. As you know retail overall for us as you know we don’t in the aggregate have a lot of our volume focused on the US department store sector that’s not where we do a majority of our volume certainly. The retailers are just playing it smart, if you’re narrow and you’re deep and you have what they want they’re going to order it you just need to make sure that you’ve got the right stuff for them.

Mitch Kummetz – Robert W. Baird

On international business what was the actual overall international sales growth in the quarter? It didn’t sound like currency had a real impact on the international revenues but it sounded like it helped gross margin out a little bit so maybe you could talk about the earnings impact from currency in the quarter as well.

Don Grimes

In the quarter our US business represented about 56% of total revenue. Obviously international is up 44%. The impact of foreign exchange on the revenue translation was fairly minimal in the quarter just a little over $1 million. As it relates to the impact of FX in total on earnings consistent with what we talked about last quarter over the last few years the weaker US dollar has impacted our ability and other footwear companies and other broader retail companies from their ability to take price increases in Europe.

We think there are so many dynamics that are intertwined with what has been a trending weaker dollar over from five years ago to now that we’re not really taking that revenue translation impact and dropping it to the gross margin line or to the operating margin line therefore the FX benefit on those profit lines is ‘x’ percent because I think it gives somewhat of a distorted view of the impact of FX on our organic growth rate or stripping out that to get the organic growth rate.

It had a minimal impact on revenue translation. A little bit more of a percentage impact on reported operating expenses, our reported expenses actually almost a percentage point due to FX but beyond that if the dollar had been stronger versus prior year we would have taken price increases so that’s why we’re not going to try to distill it down to FX impact on EPS for example.

Mitch Kummetz – Robert W. Baird

With Hush Puppies revenues being down as much as they were in the quarter and granted that doesn’t include the international licensed business but how should we think about that in Q4, it sounded like there were a number of factors that contributed to that drop in revenue and I’m not sure how much of those are ongoing.

Blake Krueger

We would expect more normal performance in Q4 for Hush Puppies overall. The international business had a very, very strong Q3 and the momentum there is very good. We did have some factory closings, product delays for Hush Puppy especially that had an impact domestically on Q3 results and we’ve taken some action there and that should be back to normal by Q4.

Operator

Your next question comes from Todd Slater – Lazard Capital.

Todd Slater – Lazard Capital

Do you think you still have enough room for operating margin expansion in ’09 with all the higher sourcing and freight costs and perhaps a higher dollar, can you stay disciplined on the operating expense line next year and maybe raise prices enough commensurate with some of your cost increases to offset the other pressures and maintain your long term EPS growth model? Could you quantify what you’re seeing right now, what you’re thinking of your long term EPS model?

Don Grimes

We’re in the middle obviously of our 2009 plan; we’re towards the tail end of our 2009 planning process, although things will change as we close out 2008. We’re certainly planning for operating margin expansion next year. I think that our gross margin expansion, our outlook for next year is not as strong as it would have been six or nine months ago. As a result we’ll have to be a little more disciplined on the SG&A side.

It’s obviously a challenge of balancing how much you’re investing for the future but how much you’re able to spend currently. We are not planning for gross margin deterioration and we’re not planning for operating margin deterioration we are planning for growth in both of those. The challenge will be to deliver that but that’s what our expectation is and our outlook is going forward.

Todd Slater – Lazard Capital

As the gross margin expansion or lack of it, not deterioration that you just commented on largely a function of price increases?

Blake Krueger

I think we’re going to address that the pricing situation still some pressure is coming out of China, a number of different ways. One, we’re going to stay flexible so we’ll be looking at different sourcing alternatives for certain lines and certain brands. We’re going to look at reengineering product, that’s not taking the quality out of the product but reengineering product to offset some of those. We’re going to expect our factories also to get leaner and adopt some principles of lean manufacturing and many of those factories are already on that path.

The last thing you have to remember is there’s a lot more to supply chain than just FOB costs out of the factory. The supply chain we’ve got a very good supply chain, we ship about 40 million pairs of footwear to 200 countries around the world. We’ve got some pockets of inefficiencies and some potential improvements. We’re going to squeeze more out of our macro supply chain to address. Then we’ll selectively take some price increases as we have this year.

Todd Slater – Lazard Capital

Are you planning in you operating margin expansion plans for ’09 are you planning for a stronger dollar, a significant change let’s say or any meaningful change in that calculation?

Don Grimes

Our current outlook is for a modestly stronger dollar. To answer your second question the company’s position has been for a number of years in mid single digit revenue growth and double digit earnings per share growth. Nothing has changed our outlook in terms of our desire to grow earnings per share at a double digit rate. That has not changed.

Operator

Your next question comes from Jim Duffy – Thomas Weisel.

Jim Duffy – Thomas Weisel

I was wondering if you could provide some perspective on the leather operations.

Blake Krueger

Our leather business is having a very good year for us. Demand has been steady throughout the year. In the overall market leather prices have been pretty stable this year, pretty stable over the last six months. The pricing pressures that we’ve seen from China really have not had that much to do with leather increases. In our own Wolverine performance leather business has been very good this year.

Jim Duffy – Thomas Weisel

Around the bankruptcy of one of your US customers is that expected to have a hangover in Q4?

Blake Krueger

I think it will have an impact on Q4 and maybe next year going forward. It wasn’t a majority or a large significant customer but it was still a significant customer. You’ll see a little bit of an impact on Q4 for Hush Puppies and into next year a little bit.

Jim Duffy – Thomas Weisel

Can you help me quantify it a little bit?

Blake Krueger

It would be safe in saying it was about the $2 million level.

Operator

Your next question comes from Jeff Blaeser – Morgan Joseph.

Jeff Blaeser – Morgan Joseph

Can you give us any difference you’re seeing on retail inventory levels domestic versus international?

Blake Krueger

Right now if I focus on Europe, I think Europe is trailing the US by about six to nine months. Our impression in Europe is that inventory levels overall are good. They are having some of where we were maybe six or nine months ago. Some countries in Europe I would say my overall impression this is really a guess is that inventories are probably a little bit tighter here in the United States simply because all of our good retailers have been working on that factor for a year now.

Jeff Blaeser – Morgan Joseph

Next year do you have any expectations for whether we will flip flop domestic being a little stronger than internationally or too early to tell?

Blake Krueger

I wish I had that crystal ball. I can’t even tell you if we’ve going to have a bail out bill passed by the end of this week.

Don Grimes

Are you asking about whether we expect sales growth to be stronger in the US next year or inventory positions?

Jeff Blaeser – Morgan Joseph

Growth rates more so. Obviously what you’re dealing with more, easier comps on the domestic side.

Blake Krueger

Frankly we’re just trying to be out there with superior product. We know in the footwear industry if you’re out even in tough times with superior product you’re going to take market share. Even though the economy may continue to chug along and struggle a little bit here for a while those people that have superior product are going to do just fine.

Jeff Blaeser – Morgan Joseph

On the Merrell side, ‘x’ apparel do you have a Merrell footwear growth rate, I’m assuming that was a blended that you gave.

Blake Krueger

The Merrell footwear growth I’m trying to recall would have been upper mid single digits in the quarter.

Operator

Your next question comes from Heather Boksen – Sidoti & Company.

Heather Boksen – Sidoti & Company

You mentioned the Merrell store in San Francisco has been better than you guys anticipated so far. Given those results can you talk about you’re going to open nine stores in Q4 but what the longer term opportunities for Merrell retail stores in the US.

Blake Krueger

Right now when we take an international view of Merrell, Merrell is still early in the brand curve, early in its life cycle. It’s sitting here today with about 70 stores around the world. The Hush Puppy brand is around 480 for example. With the addition of Merrell bags and Merrell apparel the opportunity from a retail vertically controlled perspective is at least as great for Merrell as it currently is for Hush Puppies.

In the US we will selectively open stores ourselves. We have a pretty constant stream of requests coming from great independents who would like to open up Merrell stores here domestically so we have opened up some franchise stores and we’ll continue to open up some franchise stores. On the international side all of those stores would really be opened with our guidance and product flow help but they would be opened by our international partners on their nickel and with their capital.

We obviously see Merrell apparel as a key component to opening up Merrell lifestyle stores and frankly helping to make Merrell our first billion dollar brand.

Heather Boksen – Sidoti & Company

You didn’t really mention it. I know it’s still up in the air, but regards to in Europe the footwear duties, what are you guys planning with respect to that. Are you factoring that into, what are your expectations there going forward with that for your business?

Blake Krueger

Our expectations and our planning is that they are going to continue. We believe the original decision was 100% political and 0% economic. We think some of the recent votes that have taken a negative view of those duties by some of the member states are correct but we also understand the EU commission process, it’s going to be a long process and maybe they’ll eventually get back to the right results and throw the duties out but right now we’re planning on the duties staying in place for next year, that’s how we’ve planned 2009 for sure.

Heather Boksen – Sidoti & Company

On the off chance they got repealed you’d revisit it but for now you’re planning conservatively with regards that.

Blake Krueger

Yes, we would say realistically given what we know about the commission and the revenue stream they’ve been enjoying.

Heather Boksen – Sidoti & Company

Just a couple housekeeping questions, diluted share count for the third quarter and CapEx and deprecation and amortization?

Don Grimes

Diluted share count for the third quarter using the EPS calculation was 50.0 million shares. Year to date CapEx is $12.5 million. For the full year depreciation is projected to be in the $22 to $23 million range. I’ll get back to you with the actual Q3 depreciation and amortization.

Operator

Your next question comes from Jeff Mintz – Wedbush.

Jeff Mintz - Wedbush

I was wondering if you could go through, last year on the Q3 call you provided guidance for the out year for 2008 can you just talk about why you’ve chose not to provide guidance for 2009 on this call?

Don Grimes

The markets are so fluid and unstable right now. The last couple years, I’m not sure how long it goes back we’ve been providing next year guidance with the Q3 earnings call. We still have three plus months left in this fiscal year and the way the markets are consumer behavior is gyrating on almost a weekly basis we just made the decision we’ll have much better visibility to ’09 when we get deeper into the fourth quarter. We’ll give our 2009 guidance with our Q4 earnings call or sometime appropriately before then.

Operator

Your next question comes from Scott Krasik - CL King.

Scott Krasik - CL King

What is the operating income percentage international?

Don Grimes

The operating margin?

Scott Krasik - CL King

No, you said international was 24% of total sales.

Don Grimes

We typically disclose the revenue breakout between US and international but not the profit contribution.

Scott Krasik - CL King

In the second quarter you said there was more than 60% of your total operating income.

Don Grimes

The pre-tax contribution, it is still 60% international and 40% US.

Scott Krasik - CL King

You guys have been talking about the impact from exiting the slipper business since I think the third quarter last year, the private label boot business since the second quarter. When are we past that?

Don Grimes

We’ll be past it after Q4. You’re right it has been a consistent theme. We actually had about $13 million of full year ’07 revenue from those three exited businesses. We have $4 million in Q4 of last year. We’ll have a negative impact on reported Q4 revenue growth from the decision to exit those businesses. Once we get past Q4 and ’09 we won’t talk about it ever again.

Operator

At this time we have no further questions.

Christi Cowden

On behalf of Wolverine World Wide I’d like to thank you all for joining us today and as a reminder our conference call replay is available on our website at www.WolverineWorldWide.com. The replay will be available through Wednesday October 15, 2008. Thank you and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Wolverine World Wide, Inc. F3Q08 (Qtr End 09/06/08) Earnings Call Transcript
This Transcript
All Transcripts