Wolverine World Wide reported strong growth in North America, led by double-digit growth in the Merrell business and gains in most international markets in the second quarter ended June 18, but Europe came in “somewhat” weaker than the year-ago period. The Wolverine Brands Group, the Heritage Brands Group, and the Outdoor Group all posted double-digit revenue growth for the second quarter, while Hush Puppies, the Heritage Brands Group, and the Wolverine Footwear Group all posted double-digit earnings growth for the period.

Tim O’Donovan, chairman and CEO of Wolverine World Wide, said that many European retailers grew more cautious in Q2 as spring season sales were slow to develop and retailers moved to manage their inventories more conservatively. He said that the European business was still up in mid-single-digits for the first half and that fall bookings were up as well, leading him to expect continued share gains there.

Second quarter revenues got a boost from a change in how the company works with one international distributor, which accounted for 3.8% of the total revenue increase for the period. The change, which saw the business shift from a distributor basis to a wholesale basis, had a negative 140 basis points effect on gross margins, which, coupled with a 10 bps hit from increased product costs, more than offset a 20 bps gain in GM from a shift in product mix.

The Hush Puppies business was down roughly 3.8% for Q2, due primarily to lower sales in the U.S., which Mr. O’Donovan attributed to reduced close-out and discount channel sales. He said that the double-digit earnings growth for the brand was due to a “significant” improvement in gross margins that was fueled by a change in product mix to more upper-end product in upper-tier channels of distribution.

Revenues in the Heritage Brands Group, which includes the Caterpillar and Harley Davidson licensed brands, were up 13.4% for the period, with both brands posting double-digit growth. While sales in the U.S. and through international distributors were up for the quarter, the U.K. and Europe were said to be softer on weaker retail conditions.

The Wolverine Footwear Group posted a 13.8% increase in revenues for Q2, with both Wolverine and Bates posting double-digit growth. Mr. O’Donovan said the Wolverine brand increase was driven by strong consumer demand for the core work boot product. He said the Bates increase was driven by the timing of Dept. of Defense shipments, a strong double-digit increase in the civilian uniform business, and increased exports to Europe and the Middle East.

The Outdoor Group, which contains the Merrell and Sebago brands, continued to be the most significant driver on the revenue front, despite a decline in the European business. Outdoor group revenues improved 15.3% for the period, driven by a 17.0% increase in the Merrell business and a slight improvement in the Sebago business.

The Merrell brand posted double-digit revenue gains in the U.S., Canada, and the international distributor business, while Europe was said to be “modestly lower” for the period. Mr. O’Donovan said that the brand saw “solid sell-through” of spring product across its three primary channels in outdoor specialty, department stores, and independent shoe stores in the U.S. He pointed to “newfound strength” in the trail running category and the “ongoing success” of the multi-sport category. Sandals sell-through were said to be good where the weather cooperated. The brand is reportedly picking up “significant market share” in Canada and is gaining shelf space in the U.K., France, and Spain, despite general retail weakness in Western Europe.

Merrell order backlog for fall was up in all regions at quarter-end.

Mr. O’Donovan said they are putting together a much stronger Sebago package that has “greater appeal” for their international distributors as they shift production from the original Maine factory to their operation in the Dominican Republic.

The CEO said the Patagonia Footwear project is progressing rapidly and on target with 32 styles in the Spring ’07 line debuting at recent sales meetings. He said there will be a few shipments of Patagonia product in Q4 to retailers in the Sunbelt states, but most will ship in the Q1 next year. He said they were “encouraged” by the breadth of accounts interested in the line, including their “very best” independents and top-tier department stores.

Total backlog for the company was up 8.0% at quarter-end, with mid-single-digit or greater backlog increases in three of the four Groups, with only the Wolverine Footwear Group posting a decline due to reduced demand for Bates uniform product from the DOD. Excluding the DOD effect, overall order backlog was up about 12% at the end of the second quarter. Order backlog in Europe was said to be “up and up consistently” across the brand portfolio. The FX rate had a one percent positive effect on total backlog at quarter-end.

Based on the strength of the order backlog and revenue growth through the first half, WWW increased its full-year guidance to a range of $1.12 billion to $1.14 billion, which would represent a mid- to upper-single-digit increase at the mid-point. The full-year EPS estimate was also increased to a range of $1.38 o $1.42 per share.

Wolverine Worldwide, Inc.
Second Quarter Results
(in $ mm) 2006 2005 Change
Total Sales $238.5 $215.7 10.5%
GM % 37.9% 39.2% -120 bps
SG&A % 28.8% 29.8% -100 bps
Net Income $14.2  $13.3  +7.4%
Diluted EPS 25¢ 22¢ +13.6%
Inventories* $186.6  $190.1  -1.8%
Accts Rec* $169.5  $157.3  +7.8%
* at quarter-end