Business context and reporting period
Wolverine World Wide designs, sources, markets and distributes footwear, apparel and accessories through a portfolio of 15 brands, consumer-direct operations and licensing/distribution partners. This filing covers the 12 weeks ended March 28, 2015; the comparable period ended March 22, 2014. The request metadata says 2014 Q1, but the filing itself reports fiscal 2015 Q1.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Revenue | $631.4 million | $627.6 million |
| Gross profit / margin | $261.4 million / 41.4% | $255.8 million / 40.8% |
| Operating profit / margin | $63.6 million / 10.1% | $63.7 million / 10.1% |
| Net earnings attributable to Wolverine | $40.1 million | $37.1 million |
| Diluted EPS | $0.39 | $0.36 |
| Net cash used in operating activities | $43.0 million | $56.1 million |
| Capital expenditures | $6.4 million | $5.6 million |
Gross margin expanded 60 basis points, mainly from price increases and fewer close-out sales, partly offset by product mix and product-cost pressures. Operating profit was essentially flat as higher SG&A offset sales and margin gains. The effective tax rate declined to 27.3% from 28.5%, reflecting a shift in income among tax jurisdictions. The declared dividend was $0.06 per share in both periods.
Segments
- Performance: revenue $243.4 million, down 2.2%; operating profit $55.7 million, down 4.0%. Foreign exchange and the Patagonia footwear license exit weighed on results; Chaco growth partly offset declines.
- Lifestyle: revenue $243.0 million, up 2.1%; operating profit $29.5 million, up 18.0%, reflecting Sperry growth, improved gross margin and closure of unprofitable Stride Rite stores.
- Heritage: revenue $126.1 million, up 4.5%; operating profit $18.1 million, up 2.3%, with Bates and Cat growth partly offset by Sebago declines.
Liquidity, debt and cash flow
At March 28, 2015, cash was $121.3 million, total debt $857.3 million and available revolving-credit capacity $181.9 million, net of letters of credit. Debt declined from $900.8 million at January 3, 2015, principally after $58.0 million of voluntary term-loan repayments. Cash fell $102.5 million during the quarter. Operating cash use reflected seasonal working-capital needs, including increases in receivables and inventory and lower accounts payable. The company reported $112.7 million of cash in foreign jurisdictions and intends to reinvest it indefinitely outside the U.S. Management said cash flow and available revolving borrowings should meet foreseeable working-capital needs. The company was in compliance with credit-agreement covenants.
Changes, outlook and risks
- Reported revenue increased 0.6%; foreign exchange reduced reported revenue by approximately $17.3 million. Store closures under the consumer-direct realignment and the Patagonia license exit reduced revenue by $5.1 million and $5.0 million, respectively.
- The 2014 consumer-direct restructuring estimate rose to $39–$43 million pretax, from an original $26.6–$32.0 million, due to broader international consolidation and higher store-exit costs. The plan targets up to 140 store closures by end-2015; 62 had closed through Q1 FY2015. Remaining charges were expected through Q1 FY2016, with approximately $11–$14 million noncash. Management expects about $12.5 million in annual pretax benefits when fully implemented.
- No specific full-year revenue or earnings guidance is provided in the filing. Management cites seasonality, consumer demand and spending, weather, currency movements, customer/order changes, supply-chain and sourcing risks, and execution of consumer-direct initiatives among factors that could affect results. Risk factors were reported as materially unchanged from the 2014 Form 10-K.
- Foreign earnings are intended to remain permanently reinvested; repatriation could result in material additional U.S. tax. Routine environmental and other legal matters were disclosed; management did not expect them to materially adversely affect financial position, results or cash flows.
- Other notable items: foreign currency translation contributed to a $9.7 million decline in comprehensive income for the quarter; pension expense increased to $6.4 million from $3.0 million. The company sold $157.3 million of selected receivables during the quarter under a nonrecourse sale program, subject to a $0.3 million fee.
Important facts for investors to verify
- Confirm the fiscal-period comparison: this is Q1 FY2015, not Q1 FY2014, and the quarters ended on different dates.
- Monitor whether the consumer-direct closures, revised restructuring costs and expected annual savings are delivered on the stated timetable.
- Assess the quality and sustainability of cash generation, including seasonal working-capital movements and continued use of receivables sales.
- Track segment trends, especially Performance Group declines, Sperry growth, and military-contract-related Bates sales.
- Review debt repayment, covenant headroom, foreign cash availability and exposure to currency movements and potential tax on repatriated earnings.