Wolverine World Wide, Inc. — Q2 2014 Form 10-Q
Reporting period: Second 12-week fiscal quarter ended June 14, 2014; year-to-date period covers 24 weeks. The company designs, sources, markets and sells footwear, apparel and accessories through a portfolio of 16 brands and wholesale, licensed, retail-store and e-commerce channels.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First 24 weeks 2014 | First 24 weeks 2013 |
|---|---|---|---|---|
| Revenue | $613.5 million | $587.8 million | $1,241.1 million | $1,233.7 million |
| Gross margin | 40.1% | 41.0% | 40.4% | 40.8% |
| Operating profit | $49.0 million | $37.0 million | $112.7 million | $88.0 million |
| Net earnings attributable to Wolverine | $27.5 million | $17.9 million | $64.6 million | $47.7 million |
| Diluted EPS | $0.27 | $0.18 | $0.64 | $0.48 |
| Operating cash flow | Not separately reported for the quarter | $65.6 million | $87.5 million |
- Q2 revenue rose 4.4%; first-half revenue increased 0.6%. Q2 growth came from all three operating groups.
- Q2 gross margin fell 90 basis points, mainly from increased retail promotions and higher product costs, partly offset by higher average selling prices. First-half margin declined 40 basis points.
- Operating expenses were lower year over year, chiefly due to reduced PLG integration costs, pension expense and incentive compensation. These savings helped lift operating profit and earnings despite lower gross margin.
- Q2 effective tax rate was 28.2%, versus 24.2%; first-half rate was 28.4%, versus 22.2%. The prior-year rates benefited from acquisition-cost deductions and the research and development tax credit, which was unavailable in 2014.
- First-half operating cash flow declined to $65.6 million from $87.5 million. Working-capital use was $42.6 million, including higher receivables and inventory, partly offset by higher accounts payable.
Financial position and capital
- At June 14, 2014, cash was $232.4 million, total interest-bearing debt was $1,131.3 million, and stockholders’ equity was $907.9 million. Cash was $214.2 million and debt $1,150.0 million at December 28, 2013.
- Cash and cash equivalents plus current assets were $1,193.0 million; current liabilities were $335.1 million. Available revolving-credit capacity was $196.7 million, net of letters of credit.
- Approximately $199.0 million of cash was held outside the United States and was intended to be permanently reinvested. Repatriation could result in additional U.S. tax.
- Debt included a $755.6 million variable-rate Term Loan A and $375.0 million of 6.125% senior notes due October 2020. A swap converted $430.9 million of variable-rate debt to fixed-rate exposure. The company reported compliance with credit-agreement covenants and expected continued compliance.
- First-half capital expenditures were $12.5 million; dividends paid were $12.0 million. The quarterly dividend was $0.06 per share. No open-market repurchases were made under the newly authorized $200 million, four-year program; employee-plan transactions resulted in $9.4 million of share purchases.
Segments and material changes
- Lifestyle: Q2 revenue rose 3.5% to $264.1 million, but operating profit fell 14.6% to $39.1 million. First-half revenue declined 4.5% and operating profit fell 30.3%, reflecting weakness and margin pressure at Sperry Top-Sider and Stride Rite. Keds grew, supported by marketing investment.
- Performance: Q2 revenue rose 5.8% to $211.2 million and operating profit increased 23.3% to $37.6 million. First-half revenue and operating profit grew 4.5% and 17.4%, respectively, led by Saucony and Chaco.
- Heritage: Q2 revenue increased 2.6% to $113.5 million while operating profit declined 9.9% to $14.5 million. First-half revenue and profit increased 2.2% and 2.2%, respectively.
- PLG acquisition integration costs declined to $2.5 million for Q2 and $4.1 million for the first half, compared with $7.9 million and $23.1 million in the prior-year periods.
Outlook, risks and unusual items
- The filing provides no quantitative revenue or EPS guidance. Management said operating cash flow, together with potential revolver borrowings, should meet working-capital needs for the foreseeable future; excess cash may be used for debt reduction, growth, capital expenditures, dividends or repurchases.
- On July 9, 2014, after quarter-end, the board approved a consumer-direct realignment that may close up to approximately 140 stores over 18 months and consolidate support functions. Estimated pretax charges are $26.6–$32.0 million, including $9.6–$11.6 million non-cash; expected annual pretax benefits are approximately $11.0 million. Charges are expected across the remainder of fiscal 2014 and fiscal 2015. Execution and benefits are uncertain.
- A $3.4 million non-cash charge was recorded for impairment of an equity-method investment and certain international receivables, within restructuring costs in SG&A. The company also recorded $0.5 million of first-half costs related to the Dominican Republic manufacturing restructuring and did not expect further significant costs for that plan.
- Environmental remediation claims and routine legal matters were outstanding; management believed they would not materially affect financial position, results or cash flows. Tax audits were ongoing, with no significant tax payment expected. Minimum future license-related royalties and advertising commitments were disclosed.
- Key stated risks include consumer demand and preferences, promotional and weather impacts, foreign exchange, customer/order changes, retail and e-commerce performance, cybersecurity and payment-card data breaches, supply-chain and sourcing disruptions, competition, acquisition integration, and goodwill or intangible-asset impairment.
Important facts for investors to verify
- Whether Lifestyle brands, particularly Sperry Top-Sider and Stride Rite, stabilize in revenue and margins, and whether Performance Group momentum continues.
- Whether the consumer-direct realignment stays within its estimated cost and timeline, achieves the expected annual savings, and delivers benefits after store closures.
- Whether gross-margin pressure from promotions and product costs persists, and whether inventory and receivables convert to cash as expected.
- Debt paydown, variable-rate exposure, covenant headroom, and the location and potential tax consequences of foreign cash.
- Actual cash-flow performance relative to management’s liquidity assessment and the company’s planned uses of excess cash.