Wolverine World Wide, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended January 2, 2016 (52 weeks). The filing also reports fourth-quarter results; Q4 2015 was 16 weeks versus 17 weeks in Q4 2014. This is not a filing for fiscal 2014.
Business context
Wolverine designs, sources, markets and distributes footwear, apparel and accessories through a portfolio of owned and licensed brands, including Merrell, Saucony, Sperry, Wolverine, Cat, Bates, Keds and Hush Puppies. Products reach approximately 200 countries and territories. The company reported Lifestyle, Performance and Heritage segments, plus Other and Corporate. It operated 390 U.S. and Canadian retail stores and 70 consumer-direct websites at year-end.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $2,691.6 million | $2,761.1 million |
| Gross margin | 39.1% | 39.3% |
| Operating profit | $201.1 million | $229.9 million |
| Net earnings attributable to Wolverine | $122.8 million | $133.1 million |
| Diluted EPS | $1.20 | $1.30 |
| Cash from operating activities | $215.5 million | $314.6 million |
| Capital expenditures | $46.4 million | $30.0 million |
| Year-end cash and cash equivalents | $194.1 million | $223.8 million |
| Year-end debt | $820.0 million | $900.8 million |
FY2015 operating margin was approximately 7.5% and net margin attributable to Wolverine approximately 4.6%. Net debt was approximately $625.9 million. Available revolving credit capacity was $496.2 million; the company reported covenant compliance. Current assets were $1,013.8 million against current liabilities of $353.3 million. The board declared $0.24 per share in dividends for the year.
Material changes versus the prior period
- Revenue fell 2.5%. Management attributed the decline principally to foreign exchange ($65.6 million), store closures ($37.9 million) and the Patagonia footwear business exit ($22.0 million), partly offset by growth, primarily in Performance.
- Gross margin decreased 20 basis points. Foreign exchange and international product mix weighed on margin; price increases, product-cost reductions and fewer markdowns partly offset the pressure.
- Operating profit declined 12.5% and attributable net earnings fell 7.7%. Operating expenses were lower overall, but brand investment, pension expense, and restructuring and impairment costs were higher.
- Operating cash flow fell by $99.1 million. Management cited lower earnings and less favorable working-capital movements; inventory increased $68.8 million during the year.
- Debt declined $80.8 million, including $58.0 million in voluntary debt payments. The company refinanced in July 2015, extending the term loan and revolver maturities to July 2020.
- By segment, Lifestyle revenue and operating profit fell 5.1% and 10.0%; Performance revenue was essentially flat and operating profit decreased 1.4%; Heritage revenue and operating profit fell 2.7% and 15.4%.
In Q4, revenue was $751.2 million versus $808.9 million, while attributable net earnings were $11.6 million versus $10.7 million. The periods differ in length, limiting direct comparison.
Outlook, commentary and risks
- The filing provides no quantified company-wide FY2016 revenue or earnings guidance. Management said operating cash flow and available revolver borrowings were expected to meet foreseeable working-capital needs; excess cash was expected to support debt reduction, growth, capital spending, dividends or repurchases.
- The 2014 consumer-direct realignment was expected to close approximately 140 stores by the end of Q1 FY2016. The company had closed 104 by FY2015 year-end. Estimated total pretax charges rose to $45–$48 million, with approximately $16–$18 million noncash; management expected annual pretax benefits of about $16 million once implemented.
- Order backlog was approximately $1.032 billion at February 20, 2016, down from $1.182 billion a year earlier. Orders are cancellable and backlog may not predict eventual shipments.
- FY2015 included $34.6 million of restructuring and impairment costs in operating expenses and $3.0 million of restructuring costs in cost of goods sold. Charges included store impairments, the Cushe wind-down and trade-name impairments. The company recorded $2.6 million for Cushe and $2.5 million for Stride Rite; it warned further impairment could arise if results continue to decline, noting reduced fair-value cushion for Stride Rite and Sperry trade names.
- Key risks include foreign-currency movements, consumer demand and fashion trends, inventory management, weather, overseas sourcing and trade disruption, wholesale customer changes, consumer-direct store economics, and competition. The company sources approximately 99% of footwear from third parties, primarily in Asia Pacific.
- Environmental and other litigation matters were described as routine or unresolved; management did not expect their outcomes to materially affect financial position, results or cash flows. The company reported effective disclosure controls and internal control over financial reporting, and the auditor issued unqualified opinions.
Most important facts for investors to verify
- Whether FY2016 sales, margins and operating cash flow stabilize after FY2015 declines, particularly given currency effects and the 52-week versus 53-week annual comparison.
- Whether inventory growth is converted to sales without increased markdowns, and whether backlog translates into shipments.
- Actual costs, completion timing and realized savings from the store-closure and consumer-direct realignment plan.
- Performance and impairment assumptions for the Stride Rite and Sperry trade names, and the effects of the Cushe exit.
- Debt repayment progress, covenant headroom, cash availability and the sustainability of dividends and share repurchases.