Softness in its major markets held down the sales of Merrell in the first quarter ended March 28, but management said the brand was performing well at full price despite the slowdown. Furthermore, the group’s so-called Heritage Brands – Caterpillar and Harley-Davidson footwear as well as Sebago – improved their margins by 2.3 percentage points in spite of lower sales.

Overall, Wolverine World Wide’s sales fell by 11 percent to $255.3 million in the quarter, resulting in a 56 percent drop in net income to $10.5 million. These rather ominous figures mask some extraordinary factors. Net income came after one-time restructuring costs of $14.5 million, and sales would have declined by only 5.2 percent if the value of the dollar had remained the same.

Wolverine characterized the quarter’s results as strong, given the challenging environment, and noted that sales exceeded expectations due to strength in the at-once business, as opposed to forward orders. At-once sales, which historically represent 45-50 percent of sales, are running about 5 points higher now in light of retailers’ inventory concerns.

The gross margin fell by 1.9 percentage points to 40.3 percent because of inventory charges from the reorganization and higher purchase costs. Adjusting for the charges, the margin fell by 1 percentage point to 41.2 percent. The operating margin was more than halved to 6.1 percent from 12.6 percent, but would have been 11.7 percent excluding the restructuring charges. The restructuring plan is expected to save the company $17 million to $19 million a year before taxes.

The company’s 15.6 percent increase in its own inventories seemed at odds with its steady projection of a drop in this year’s revenues to a level of between $1.07 billion and $1.15 billion, compared with $1.22 billion in 2008. The company said the inventory increase was dictated by Chaco’s acquisition, higher input costs from China, pre-purchases of leather and of outsourced Merrell products in advance of future price increases.

Merrell’s Outventure line of performance outdoor footwear continued to be successful and its Fusion line of casual outdoor shoes has had encouraging sell-through for the spring. Deliveries of Merrell clothing are ahead of plan. Patagonia footwear had a low single-digit increase, and Chaco has been successfully integrated. Wolverine added that it would continue to look for acquisition opportunities like Chaco where it can leverage its operational capabilities.

Overall, the Outdoor Group, which makes up the bulk of Wolverine’s revenues, suffered a low single-digit sales decline in the quarter, in terms of dollars. For the Wolverine Footwear Group, revenues came in higher than expected but still below the prior year’s.

The group’s business outside the U.S., which typically makes up about 40 percent of total sales, probably fell to about 30 percent because of the stronger dollar. The international business did well for the quarter, but the management feels that Europe is three or four months behind the U.S. in terms of the recession, and it is waiting to get a better feel for its economic conditions.

Wolverine is in line to have 100 concept stores and 1,000 shop-in-shops for Merrell by the end of this year. The company sees direct-to-consumer sales exceeding 15 percent of the brand’s revenues in five years, but there are no concrete plans yet for the European market beyond the stores already opened by the Italian licensee.

The company wants to expand the exposure of Merrell, Caterpillar and Hush Puppies in some European markets where they are more under-represented than in others.

Meanwhile, service levels are being improved in Europe, integrating processes for all the brands across the region. Customer service functions are being centralized in London and Paris and warehousing in the Netherlands. Products will no longer be distributed out of the U.K..

Wolverine plans to continue its policy of keeping sales at full price for its products, avoiding the heavy promotions that many companies are resorting to during the economic downturn. It is expecting a third quarter that will be tougher than the second or the fourth one, but noted that incoming orders are inconsistent and unpredictable.