Wolverine World Wide, Inc. — Form 10-Q Summary
Period clarification: The filing covers the 13 weeks ended April 1, 2017. Although the request metadata says 2016 Q1, the filing compares this period with the 12 weeks ended March 26, 2016. The extra week contributed $43.2 million of reported revenue, limiting direct year-over-year comparability.
Business context and results
Wolverine designs, sources, markets and sells branded footwear, apparel and accessories, including Merrell, Sperry, Saucony, Keds and Wolverine. Its brands are sold in approximately 200 countries and territories. The company also operates retail stores, e-commerce sites and a leather business.
| Metric | Q1 2017 | Prior comparable period |
|---|---|---|
| Revenue | $591.3 million | $577.6 million; reported increase 2.4% |
| Gross profit / margin | $234.7 million / 39.7% | $228.8 million / 39.6% |
| Operating profit | $32.6 million | $34.0 million |
| Net earnings attributable to Wolverine | $16.7 million | $17.4 million |
| Diluted earnings per share | $0.17 | $0.18 |
| Net cash used in operating activities | $30.8 million | $78.9 million |
| Capital expenditures | $11.1 million | $9.9 million |
Material changes and segment performance
- Reported revenue growth included $43.2 million from the additional operating week. Management also cited challenging U.S. retail conditions, store closures and unfavorable foreign exchange; currency reduced revenue by approximately $2.5 million.
- Gross margin improved 10 basis points, reflecting product cost improvements partly offset by mix, store closures and foreign exchange. Operating profit fell 4.1%, with higher restructuring and impairment costs among the principal factors.
- Outdoor & Lifestyle revenue rose 6.8% to $232.6 million; Boston revenue declined 2.5% to $203.9 million; Heritage rose 5.4% to $75.7 million; and Multi-Brand fell 5.8% to $64.4 million. These reported comparisons also include the extra week.
- Operating cash use improved year over year but remained negative, reflecting seasonal working-capital needs, including cash uses from accounts receivable, inventory, accounts payable and other operating liabilities.
Liquidity, debt and other financial matters
- At April 1, 2017, cash and cash equivalents were $304.1 million, total debt was $813.1 million, and available revolving-credit capacity was $597.5 million. The company reported compliance with its credit agreement covenants.
- Cash declined $65.7 million during the quarter. Cash held in foreign jurisdictions was $235.7 million; the company intends to permanently reinvest these funds outside the United States.
- The effective tax rate was 20.7%, compared with 31.4% in the prior period, due to favorable discrete items and a shift in earnings among tax jurisdictions.
- Inventory was $356.5 million, down 25.9% from March 26, 2016. The company declared a $0.06-per-share dividend.
Outlook, restructuring, risks and contingencies
- No specific revenue or earnings guidance is provided in the filing. Management expects operating cash flow and, if needed, revolver borrowings to meet working-capital needs for the foreseeable future.
- The 2016 consumer-direct realignment had closed 155 stores through Q1, with approximately 115 more planned for closure by fiscal year-end. Estimated total pretax charges are $66 million to $71 million; expected annual pretax benefits are approximately $20 million. Cumulative charges through Q1 were $29.7 million.
- Quarterly restructuring and impairment costs included $4.6 million in cost of goods sold and $20.0 million in operating expenses. The company recorded a $4.5 million property-and-equipment impairment charge.
- Risks highlighted include consumer spending and retail conditions, competition and changing preferences, inventory management, foreign exchange, sourcing costs and disruptions, key customer relationships, military contract awards, consumer-direct execution, and potential impairment of goodwill or intangible assets. The company also noted possible additional U.S. tax if certain foreign earnings are repatriated.
- Environmental and other legal matters were described as ordinary-course matters; management does not expect them to materially adversely affect the company. Routine tax audits are ongoing, with no significant tax payment expected, according to management.
Important facts for investors to verify
- How results compare on a like-for-like basis after adjusting for the extra reporting week.
- Whether planned store closures, remaining restructuring charges and expected annual savings track management’s estimates.
- Whether challenging U.S. retail conditions and weaker demand in certain brands affect sales, retailer inventories and margins.
- Cash-flow seasonality, the availability and terms of financing, covenant compliance, and the practical accessibility of cash held overseas.
- Whether operating results support the carrying values of significant trade names, particularly Sperry and Stride Rite.