Business context and reporting period
Wolverine World Wide, Inc. designs, markets and distributes footwear, apparel and accessories across owned and licensed brands, consumer-direct operations and leather businesses. This Form 10-Q covers the 12-week third quarter and 36 weeks ended September 10, 2016; comparisons are with periods ended September 12, 2015. The request metadata says 2015 Q3, but the filing itself is for 2016 Q3.
Financial performance and liquidity
| Metric | 12 weeks ended Sep. 10, 2016 | 12 weeks ended Sep. 12, 2015 | 36 weeks ended Sep. 10, 2016 | 36 weeks ended Sep. 12, 2015 |
|---|---|---|---|---|
| Revenue | $603.7 million | $678.9 million | $1,765.0 million | $1,940.4 million |
| Gross profit | $237.3 million | $271.7 million | $692.7 million | $779.5 million |
| Operating profit | $69.0 million | $75.9 million | $144.8 million | $187.1 million |
| Net earnings attributable to Wolverine | $48.2 million | $45.8 million | $89.6 million | $111.2 million |
| Diluted EPS | $0.49 | $0.44 | $0.91 | $1.08 |
| Operating cash flow | Not reported for quarter alone | Not reported for quarter alone | $143.2 million | $109.8 million |
- Third-quarter gross margin was 39.3%, down 70 basis points year over year; year-to-date gross margin was 39.2%, versus 40.2%. Management cited unfavorable foreign currency as the principal pressure, with year-to-date margin also affected by higher restructuring costs and partly offset by favorable product costs.
- Third-quarter effective tax rate was 19.5%, compared with 29.0%; year-to-date rate was 24.1%, compared with 29.0%. The lower rates reflected earnings mix across tax jurisdictions and favorable discrete items.
- At September 10, cash was $530.9 million, total debt $1,052.4 million, and available revolving-credit capacity $497.4 million. The $393.5 million current debt classification principally reflected Public Bonds that were redeemed after quarter-end. Cash and cash equivalents included $182.0 million held in foreign jurisdictions that the company intended to permanently reinvest.
- Current assets were $1,340.6 million and current liabilities $724.8 million. Inventory was $457.6 million, down 7.6% from the prior-year quarter.
- Year-to-date capital expenditures were $34.4 million; dividends paid were $17.7 million. The company repurchased $15.8 million of shares during the first 36 weeks and repurchased 417,816 shares in the third quarter at an average $23.55 per share.
Material changes versus comparable periods
- Third-quarter revenue fell 11.1%; year-to-date revenue fell 9.0%. Management attributed weakness to a challenging U.S. retail environment, high inventories at key retail partners, lower store traffic and spending, company store closures, the exit of the Cushe brand and unfavorable currency movements.
- Third-quarter net earnings attributable to Wolverine rose 5.2% and diluted EPS increased to $0.49 from $0.44, despite lower revenue and operating profit; lower tax expense contributed. For the first 36 weeks, attributable earnings declined 19.4% and diluted EPS fell to $0.91 from $1.08.
- Third-quarter segment revenue declined across Outdoor & Lifestyle (13.3%), Boston (9.0%), Heritage (1.5%) and Multi-Brand (16.1%). Boston Group operating profit increased 3.4% in the quarter, while Outdoor & Lifestyle, Heritage and Multi-Brand operating profit declined.
- Operating cash flow increased to $143.2 million from $109.8 million year to date, while investing cash outflow was $24.5 million versus $32.9 million. Financing provided $216.5 million, compared with $98.8 million used in the prior-year period, principally reflecting debt issuance activity.
- Year-to-date operating profit decreased 22.6%, partly reflecting lower revenue and restructuring costs. SG&A fell 8.6%, but restructuring and impairment costs rose to $13.4 million from $7.5 million.
Outlook, management commentary, risks and unusual items
- The filing gives no specific revenue or earnings guidance. Management said operating cash flow, with revolving-credit borrowings if needed, should meet working-capital needs for the foreseeable future. Excess cash may fund organic growth, debt reduction, dividends, share repurchases and acquisitions.
- After quarter-end, the company issued $250 million of 5.000% senior notes, amended its credit agreement to add $150 million to Term Loan A and $100 million of revolver capacity, and redeemed $375 million of 6.125% Public Bonds. It estimated approximately $18 million of fourth-quarter fiscal 2016 debt-extinguishment costs, including a $13.1 million redemption premium and write-off of deferred financing fees. Net debt increased $25 million from these transactions.
- The credit agreement imposes financial and other covenants; the company reported compliance as of September 10, 2016. It had $439.9 million of variable-rate debt and uses interest-rate swaps and foreign-exchange forwards to manage exposures.
- The completed 2014 consumer-direct restructuring incurred cumulative costs of $49.5 million and was expected to generate approximately $16 million in annual pretax benefits. Separate fiscal 2016 organizational changes generated $6.3 million of restructuring costs through the period, with another $4–$5 million estimated for the fourth quarter. The company also recorded costs related to winding down Cushe.
- The company warned that weaker future results could lead to impairment of indefinite-lived intangible assets, particularly Stride Rite and Sperry trade names. Other cited risks include consumer demand and retail conditions, competition and brand relevance, inventory management, foreign currency and sourcing, major customer relationships, seasonality and weather, military contracts, litigation and regulatory matters, and pension funding. Management reported no material change in the risk-factor assessment from its 2015 Form 10-K.
- Environmental and other legal matters were described as routine or unresolved; management did not expect them to materially affect financial position, results or cash flows. Potential U.S. tax on foreign earnings could be material if earnings treated as permanently reinvested were repatriated.
Important facts for investors to verify
- Confirm the intended reporting year: the supplied metadata says 2015 Q3, while the filed report covers the quarter ended September 10, 2016.
- Track whether sales and margins recover from the broad-based declines, especially in Outdoor & Lifestyle and Boston, and whether retailer inventory and store traffic improve.
- Review fourth-quarter results for the estimated $18 million bond-redemption charge and the additional restructuring costs, and assess the effect on earnings and cash flow.
- Reconcile post-quarter debt transactions, maturities and cash use; the quarter-end current-debt balance includes bonds subsequently redeemed.
- Monitor restructuring benefits, inventory quality, foreign-exchange effects, tax-rate variability and any impairment indicators for major trade names.