Wolverine World Wide, Inc. — Form 10-Q Summary
Period: Quarter ended September 30, 2017; filed November 9, 2017. The request metadata says 2016 Q3, but the filing itself reports 2017 Q3. Comparisons are not like-for-like in length: the current quarter was 13 weeks versus 12 weeks in 2016, and the current year-to-date period was 39 weeks versus 36 weeks.
Business context and results
The company designs, markets, licenses and distributes footwear, apparel and accessories through brands including Merrell, Sperry, Saucony, Wolverine and Hush Puppies. It operates in about 200 countries and territories and reported 107 retail stores in the U.S. and Canada and 31 consumer-direct websites at quarter-end.
| Metric | Q3 2017 | Prior comparable period | First three quarters 2017 | Prior comparable period |
|---|---|---|---|---|
| Revenue | $581.3 million | $603.7 million; down 3.7% | $1,771.4 million | $1,765.0 million; up 0.4% |
| Gross margin | 39.7% | 39.3% | 39.1% | 39.2% |
| Operating profit | $35.3 million | $69.0 million | $97.1 million | $144.8 million |
| Net earnings attributable to Wolverine | $23.2 million | $48.2 million | $60.6 million | $89.6 million |
| Diluted EPS | $0.24 | $0.49 | $0.62 | $0.91 |
| Operating cash flow | Not separately presented for the quarter | Not separately presented for the quarter | $49.5 million | $143.2 million |
Gross margin improvement in Q3 reflected product-cost gains and favorable mix, partly offset by foreign exchange and store closures. Year-to-date gross margin edged lower as unfavorable mix, currency and store closures more than offset product-cost improvements. Results include substantial restructuring and impairment costs.
Liquidity, debt and cash flow
- At September 30, 2017, cash was $342.7 million, total debt was $796.7 million, and available revolving-credit capacity was $597.5 million. Cash less debt was approximately negative $454.0 million.
- Year-to-date operating cash flow was $49.5 million, down from $143.2 million. Investing activities provided $5.2 million, including $38.0 million of proceeds from business and asset sales; capital expenditures were $28.7 million. Financing activities used $87.4 million, including $42.3 million of share repurchases and $17.4 million of dividends paid.
- Debt declined from $820.7 million at December 31, 2016, principally from scheduled Term Loan A payments. The company reported compliance with credit-agreement covenants. Term Loan A’s weighted-average rate was 2.97%; $553.1 million of debt was variable-rate, with swaps converting $464.0 million to fixed-rate exposure.
- Management said cash flow and, if needed, revolver borrowings should meet foreseeable working-capital needs. Cash held in foreign jurisdictions was $291.4 million and intended to be permanently reinvested.
Material changes and management commentary
- Q3 revenue fell 3.7% despite an extra operating week, which contributed $28.2 million of revenue. Store closures reduced revenue by $41.6 million; foreign exchange added approximately $3.2 million.
- Outdoor & Lifestyle revenue rose 13.1% and Boston revenue declined 2.9%; Heritage grew 3.7%. Multi-Brand revenue fell 64.2%, primarily due to store closures and the Stride Rite shift to a global licensing model. The year-to-date comparison also includes three additional operating weeks.
- Operating profit fell 48.8% in Q3. Corporate operating costs rose to $74.6 million from $25.5 million, reflecting restructuring and impairment, organizational transformation, incentive compensation, pension expense and the extra week.
- Inventory was down 26.0% year over year. The company repurchased 1,139,256 shares during Q3 at an average $26.33 per share and declared a $0.06-per-share dividend.
Outlook, unusual items and risks
- The 2016 consumer-direct realignment had closed 239 stores through Q3, with about 27 more planned by year-end. Estimated total pretax charges were $73–$76 million; expected annual pretax benefits are about $20 million. The 2017 plan was expected to incur $8.5–$12.0 million of pretax charges and deliver about $11 million of annual pretax benefits.
- Q3 divestitures included the Stride Rite licensing transition and asset sale, the sale of Sebago-related assets (a reported $8.4 million gain), and the sale of the Department of Defense contract business (a reported $1.6 million loss). The company also recorded $9.6 million of property-and-equipment impairment during the first three quarters.
- Management said the Sperry trade name’s carrying value remained supported by its outlook, but weaker future results could trigger a noncash impairment; its carrying value was $586.8 million.
- Environmental claims include PFAS detected in groundwater at or near the former tannery and byproduct-disposal sites. The company is investigating with regulators; management did not expect known litigation and claims to have a material adverse effect, but outcomes remain uncertain.
- Other risks include consumer demand, competition and changing preferences, inventory management, foreign currency and sourcing, retail and brand performance, military contract awards, pension costs, and potential U.S. taxes if certain foreign earnings are repatriated. Management reported no material change to the risk factors in its 2016 Form 10-K.
- No specific full-year revenue or earnings guidance was provided in the supplied filing text. Management stated the expected restructuring benefits and liquidity view above.
Important facts for investors to verify
- Confirm the intended reporting year: filing period is Q3 2017, not Q3 2016, and prior-period comparisons cover fewer weeks.
- Track whether store-closure and organizational changes deliver the stated annual savings and whether remaining restructuring charges stay within estimates.
- Assess the underlying performance of Sperry and the Multi-Brand business, separating effects of store closures, licensing changes and calendar differences.
- Monitor operating cash generation, debt repayment, variable-rate exposure and covenant headroom.
- Follow the PFAS investigation and any potential impairment of the Sperry trade name.