Wolverine World Wide, Inc. — Form 10-Q Summary
Period clarification: The request identifies 2022 Q3, but the supplied filing is for the quarter ended September 30, 2023. Comparisons below are with the quarter ended October 1, 2022; year-to-date figures cover the first three quarters of each fiscal year.
Business context and reporting period
Wolverine designs, markets and licenses footwear, apparel and accessories through brands including Merrell, Saucony, Wolverine, Sperry and Sweaty Betty. It reported Active, Work and Lifestyle segments. The company completed the Keds sale in February 2023, sold its U.S. Wolverine Leathers business in August, and sold Hush Puppies intellectual property in China, Hong Kong and Macau in September. It is exploring strategic alternatives for Sperry.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Year to date 2023 | Year to date 2022 |
|---|---|---|---|---|
| Revenue | $527.7m | $691.4m | $1,716.2m | $2,019.8m |
| Gross margin | 40.8% | 40.2% | 39.6% | 41.9% |
| Operating profit | $27.3m | $58.8m | $118.7m | $246.3m |
| Net earnings attributable to Wolverine | $8.6m | $39.0m | $51.6m | $173.3m |
| Diluted EPS | $0.11 | $0.48 | $0.64 | $2.12 |
| Operating cash flow | Not separately stated | Not separately stated | $7.0m | $(490.2)m |
- Q3 revenue fell 23.7%; year-to-date revenue fell 15.0%. All three reportable segments declined year to date, with Lifestyle down 35.7%, Work down 18.5%, and Active down 6.4%.
- Q3 gross margin improved 60 basis points, primarily on wholesale product mix, while year-to-date gross margin contracted 230 basis points amid product costs, weaker direct-to-consumer pricing and costs, and increased closeouts.
- Year-to-date operating cash flow was $7.0m, versus cash use of $490.2m a year earlier. Inventory fell $178.5m during the period; investing cash flow included $136.0m of divestiture proceeds.
- At September 30, 2023, balance-sheet cash was $160.4m; the cash-flow statement reports $164.7m because it includes $4.3m of cash classified as held for sale. Total debt was $1,096.3m, down from $1,158.0m at December 31, 2022. Revolver availability was $623.4m.
- Net interest expense rose to $47.4m year to date from $31.3m, reflecting higher average borrowings and interest rates. The company declared dividends of $0.10 per share in Q3.
Material changes and unusual items
- Q3 results included a $57.7m gain on sales and a $40.2m impairment charge, including a $38.3m impairment of the Sperry trade name. Year-to-date gains on sales were $77.8m; impairment charges were $55.8m.
- The $55.8m gain on the Hush Puppies China-area intellectual property sale was a major component of Q3 gains. Keds and Wolverine Leathers divestitures also contributed to asset sales and cash proceeds.
- Year-to-date environmental and related costs, net of recoveries, were a $28.0m benefit, compared with $32.6m of expense in the prior-year period. The company reported a $43.6m environmental remediation reserve at quarter-end.
Outlook, risks and contingencies
- Management said it expected seasonal product flow and inventory levels to normalize by fiscal year-end 2023. It cited weak discretionary demand, retailer inventory, promotional activity, inflation, logistics and input costs, and a stronger U.S. dollar as pressures. The filing provides no numerical revenue or earnings guidance.
- Management stated operating cash flow should meet working-capital needs for the foreseeable future and anticipated using excess cash for growth, debt reduction, dividends and general purposes.
- A June 2023 credit amendment relaxed the maximum leverage covenant through fiscal year-end 2023; prior thresholds are scheduled to return in Q1 2024. The company reported compliance with covenants at September 30, 2023.
- Environmental remediation and PFAS-related matters remain material uncertainties. The $43.6m reserve includes $22.8m expected within 12 months and $20.8m expected over as long as 25 years; the company says additional costs cannot be reliably estimated. A remaining landfill-related lawsuit was stayed, and the company recorded $2.7m of liabilities for certain litigation matters.
- Further impairment of Sperry or Sweaty Betty assets is possible if results or valuation assumptions weaken. Other cited risks include consumer demand, competition, inventory management, supply chain and currency exposure.
Investor facts to verify
- Confirm the intended reporting period: the supplied filing is 2023 Q3, not 2022 Q3.
- Reconcile the MD&A liquidity discussion’s reference to $318.3m of operating cash flow with the cash-flow statement’s $7.0m year-to-date figure.
- Track sell-through, inventory normalization and the performance of Merrell, Work brands and Sperry, including any strategic-alternatives outcome.
- Monitor debt, revolver use and covenant headroom as the temporary leverage covenant amendment expires and prior thresholds return.
- Review developments in PFAS remediation, insurance recoveries and litigation that could change the recorded reserves.