Wolverine World Wide, Inc. — Form 10-Q Summary
Period: Quarter ended July 1, 2017; filed August 9, 2017. The request metadata says 2016 Q2, but the supplied filing is for 2017 Q2. Fiscal 2017’s second quarter covered 13 weeks versus 12 weeks in 2016; the first-half comparison is 26 weeks versus 24 weeks, limiting comparability.
Business context and results
The company designs, markets, licenses and distributes footwear, apparel and accessories through brands including Merrell, Sperry, Saucony, Wolverine and others. It operates across wholesale, licensing and consumer-direct channels.
| Metric | Q2 2017 | Comparable 2016 period | First half 2017 | Comparable 2016 period |
|---|---|---|---|---|
| Revenue | $598.8 million | $583.7 million | $1,190.1 million | $1,161.3 million |
| Gross profit | $226.9 million | $226.6 million | $461.6 million | $455.4 million |
| Gross margin | 37.9% | 38.8% | 38.8% | 39.2% |
| Operating profit | $29.2 million | $41.8 million | $61.8 million | $75.8 million |
| Net earnings attributable to Wolverine | $20.7 million | $24.0 million | $37.4 million | $41.4 million |
| Diluted EPS | $0.21 | $0.24 | $0.38 | $0.42 |
Cash flow, debt and liquidity
- First-half operating cash flow was $107.6 million, versus $72.8 million. Investing cash outflow was $23.0 million; capital expenditures were $19.8 million. Financing cash outflow was $45.7 million.
- Cash and equivalents were $412.8 million at July 1, 2017, up from $369.8 million at December 31, 2016. The company reported $597.5 million of available revolving-credit capacity.
- Total debt was $805.3 million, compared with $820.7 million at year-end 2016. Scheduled principal payments due over the next 12 months were $45.0 million. The company reported compliance with its credit-agreement covenants.
- Cash held in foreign jurisdictions was $283.3 million and was intended to be permanently reinvested abroad. The company said operating cash flow and available borrowing capacity should meet foreseeable working-capital needs.
Material changes and management commentary
- Reported Q2 revenue rose 2.6%; management attributed $35.5 million of revenue to the extra operating week, while retail-store closures reduced revenue by $25.3 million and foreign exchange reduced it by about $3.6 million. First-half revenue included $78.7 million from two additional weeks.
- Outdoor & Lifestyle revenue grew 14.2% in Q2, while Multi-Brand revenue declined 25.8%, primarily due to store closures. Boston Group revenue increased 1.6%; Heritage Group was essentially flat.
- Q2 gross margin fell 90 basis points. Product-cost improvements were more than offset by store closures, product mix, restructuring costs, retail markdowns and foreign exchange.
- Operating profit fell 30.1% in Q2, with corporate expenses rising $34.6 million, primarily reflecting higher restructuring and impairment costs, organizational transformation costs and other expenses. Lower net interest expense and a much lower effective tax rate partly offset operating pressure.
- The effective tax rate was 7.0% in Q2 and 13.7% for the first half, versus 26.7% and 28.8%, respectively, in the comparison periods. Management cited discrete tax items and shifts in income among jurisdictions; the low current-period rate should not be assumed to recur.
Outlook, restructuring and other significant items
- The filing provides no company-wide revenue or earnings guidance. Management expected annual pretax benefits of about $20.0 million from the 2016 consumer-direct realignment and about $8.4 million from the 2017 organizational plan, after implementation.
- The 2016 plan had closed 231 stores through Q2, with about 33 additional closures planned by fiscal year-end. Estimated total pretax charges were $71 million to $76 million; cumulative charges were $52.8 million at quarter-end. The 2017 plan’s estimated charges were $2.4 million to $2.6 million.
- After quarter-end, the company paid $27.0 million to amend or terminate 70 retail leases; it had recorded $12.2 million of related costs in Q2 and expected to recognize a further $14.8 million in Q3. It also received $16.1 million from the sale of Stride Rite-related assets following a global licensing arrangement effective July 2, 2017.
- On July 31, 2017, the company agreed to sell certain Sebago brand assets for $14.3 million and expected to recognize an approximately $8.0 million gain.
- Management identified consumer demand and fashion trends, inventory management, foreign exchange, sourcing and input costs, customer relationships, military contracts, store-closure execution, litigation and possible brand-asset impairment as risks. It stated that pending legal matters were not expected to have a material adverse effect, while noting outcomes are uncertain.
Important facts for investors to verify
- Compare sales and earnings on a like-for-like basis, accounting for the extra operating week and store closures.
- Track whether restructuring and store-exit costs remain within the disclosed estimates and whether projected savings are achieved.
- Assess the durability of gross-margin recovery and growth across major brands, particularly amid declines in Multi-Brand and certain Boston and Heritage businesses.
- Review cash generation, debt repayment, lease obligations and the availability of revolving-credit capacity.
- Evaluate whether the unusually low effective tax rate is sustainable and monitor risks associated with permanently reinvested foreign earnings.