Wolverine World Wide, Inc. — Form 10-Q Summary
Period: The filing reports the 12 weeks ended June 20, 2015, and year-to-date results for the 24 weeks ended June 20, 2015, with comparisons to 2014. The request metadata says “2014 Q2,” but the filing itself is for fiscal 2015 Q2.
Business context
Wolverine designs, markets and distributes footwear, apparel and accessories through its Lifestyle, Performance and Heritage brand groups, alongside consumer-direct and leather operations. Its portfolio included 15 brands; it operated 409 stores and 61 consumer-direct websites at quarter-end.
Financial performance
| Metric | Q2 2015 | Q2 2014 | 24 weeks 2015 | 24 weeks 2014 |
|---|---|---|---|---|
| Revenue | $630.1m | $613.5m | $1,261.5m | $1,241.1m |
| Gross profit / margin | $246.4m / 39.1% | $245.7m / 40.1% | $507.8m / 40.3% | $501.5m / 40.4% |
| Operating profit / margin | $47.6m / 7.6% | $49.0m / 8.0% | $111.2m | $112.7m |
| Net earnings attributable to Wolverine | $25.3m | $27.5m | $65.4m | $64.6m |
| Diluted EPS | $0.24 | $0.27 | $0.63 | $0.64 |
Q2 revenue rose 2.7%, while operating profit fell 2.9%, attributable net earnings fell 8.0%, and diluted EPS declined 11.1%. Year-to-date revenue grew 1.6%; operating profit declined 1.3%, while attributable net earnings increased 1.2%.
Q2 gross margin fell 100 basis points, primarily from unfavorable channel mix (115 bps) and foreign-currency forward contracts (25 bps), partly offset by selling prices exceeding product-cost increases (50 bps). Higher operating expenses, including pension and brand investment costs, also weighed on operating results. Q2 effective tax rate rose to 31.4% from 28.2%; management attributed the increase to a shift in income among tax jurisdictions.
Cash flow, debt and liquidity
- Year-to-date operating cash flow was $94.9m, compared with $65.6m in 2014. Investing cash outflow was $12.6m, including $15.8m of capital expenditures; financing cash outflow was $81.1m.
- Cash was $220.7m at June 20, 2015, down $3.1m from fiscal year-end. The company reported $196.4m of available revolving-credit capacity.
- Total debt was $833.1m, down from $900.8m at January 3, 2015. The decrease primarily reflected $58.0m of voluntary term-loan principal payments. Cash less total debt was approximately $612m of net debt.
- The company was in compliance with its credit-agreement covenants at quarter-end. On July 13, 2015, it amended its facilities, replacing them with a $450m term loan and $500m revolver, both maturing July 13, 2020; aggregate debt capacity is subject to stated limits and conditions.
- The company declared a quarterly dividend of $0.06 per share and repurchased $5.9m of common stock during the first half.
Material changes and segments
- Q2 Lifestyle revenue declined 4.1% to $253.4m; Performance revenue grew 5.7% to $223.3m; Heritage revenue grew 12.2% to $127.4m. Heritage growth included increased military-contract shipments; Performance benefited from Chaco and Saucony, while Merrell declined.
- Reported revenue was reduced by approximately $13.5m in Q2 and $30.8m year-to-date by foreign-exchange movements. Store closures under the consumer-direct realignment and the exit of the Patagonia footwear license also reduced comparisons.
- The 2014 consumer-direct realignment now carries estimated pretax charges of $41m–$45m, increased from the original $26.6m–$32m estimate. Approximately 120 stores are planned for closure by the end of 2015; 67 had closed by June 20, 2015. Remaining charges are expected through Q1 2016, with approximately $11m–$14m noncash. Management expects approximately $12.5m in annual pretax benefits when implemented.
- In Q2, the company recorded $2.9m of restructuring and impairment costs primarily related to winding down the Cushe brand.
Outlook, commentary and risks
The filing provides no specific revenue or earnings guidance. Management said operating cash flow, together with potential revolver borrowings, should be sufficient for working-capital needs for the foreseeable future. Excess cash may fund growth, debt reduction, dividends, repurchases or acquisitions.
Risks highlighted include foreign-exchange movements, consumer demand and preferences, seasonal and weather effects, customer and distributor strength, supply-chain and sourcing disruption, competition, execution of consumer-direct changes, military contract awards, and legal or regulatory matters. The company also noted that repatriating foreign earnings treated as permanently reinvested could create material U.S. tax costs. Management did not expect pending litigation, environmental claims or routine tax audits to have a material financial impact. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether Lifestyle brands stabilize and Performance and Heritage growth continues, considering currency impacts and channel trends.
- Actual costs, timing, store closures and savings from the consumer-direct realignment, and the effects of the Cushe wind-down.
- Working-capital needs, especially the increases in receivables and inventories, and the sustainability of operating cash flow.
- Debt repayment, refinancing terms, covenant headroom and the use of cash held in foreign jurisdictions.
- Gross-margin pressures from channel mix, foreign currency and product costs, as well as elevated pension expense and tax-rate changes.