Wolverine World Wide, Inc. — Form 10-Q Summary
Reporting period: The filing covers the first 12 weeks of fiscal 2014, ended March 22, 2014, compared with the 12 weeks ended March 23, 2013. Although the request metadata says “2013 Q1,” the filing itself reports fiscal 2014 Q1.
Business context
Wolverine designs, sources, markets and distributes footwear, apparel and accessories through a portfolio of 16 brands, consumer-direct stores and websites, and third-party licensees and distributors. It reported three operating segments: Lifestyle, Performance and Heritage.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $627.6 million | $645.9 million |
| Gross profit / margin | $255.8 million / 40.8% | $262.1 million / 40.6% |
| Operating profit | $63.7 million | $50.9 million |
| Net earnings attributable to Wolverine | $37.1 million | $29.8 million |
| Diluted EPS | $0.36 | $0.30 |
| Net cash used in operating activities | $56.1 million | $89.3 million |
- Revenue declined 2.8%; operating profit rose 25.1% and attributable net earnings rose 24.5%. Operating margin was approximately 10.1%, versus 7.9% a year earlier.
- Operating cash flow remained negative, primarily reflecting working-capital investment, including increases in accounts receivable of $88.0 million and inventories of $39.6 million. Capital expenditures were $5.6 million.
- Cash was $166.8 million at March 22, 2014, down from $214.2 million at fiscal year-end; $163.5 million was held outside the U.S. Available revolving credit capacity was $162.7 million.
- Interest-bearing debt was $1,174.3 million, up from $1,150.0 million at year-end; cash less interest-bearing debt was approximately $1,007.5 million. The current ratio was approximately 3.4.
- Net interest expense declined to $10.9 million from $12.9 million. The effective tax rate increased to 28.5% from 20.9%, reflecting earnings mix and expiration of the research and development tax credit.
- The quarterly dividend was $0.06 per share. The company authorized a new $200 million share repurchase program over four years; no program repurchases occurred during the quarter.
Changes versus the prior comparable period
- Lifestyle revenue fell 11.9% to $238.0 million and operating profit fell 45.8% to $25.0 million, with weakness in Sperry Top-Sider and Stride Rite. Management cited category softness, delayed seasonal deliveries, distribution realignment, lower store traffic and Easter timing.
- Performance revenue grew 3.5% to $248.8 million and operating profit grew 13.9% to $58.0 million, led by Merrell, Saucony and Chaco.
- Heritage revenue increased 1.8% to $120.7 million and operating profit increased to $17.7 million from $15.3 million.
- Operating expenses declined $19.1 million, notably because acquisition-related integration costs fell to $1.6 million from $15.2 million. Lower pension and incentive compensation expense also contributed. The prior-year cost comparison therefore materially supported operating-profit growth.
- Gross margin improved 20 basis points, as product-mix benefits more than offset higher product costs and unfavorable foreign exchange. Foreign exchange reduced reported revenue by about $1.5 million.
Outlook, risks and unusual items
- No specific revenue, earnings or margin guidance is provided. Management expects operating cash flows, together with revolving-credit borrowings if needed, to meet working-capital needs for the foreseeable future; it expected continued compliance with credit-agreement covenants.
- Management attributed the quarter’s softer revenue to weak retail traffic, temporary store closures from extreme weather, Easter timing and continued deceleration in U.S. casual footwear.
- Key disclosed risks include economic and consumer-demand changes, weather and seasonality, foreign currency movements, customer and order changes, supply-chain disruptions, competition, integration of the PLG acquisition, intellectual-property matters, and interest-rate exposure.
- The company reported $1.6 million of PLG integration costs and $0.4 million of restructuring costs. It said it did not expect further significant costs under the Dominican Republic manufacturing restructuring plan.
- Most foreign earnings are intended to remain permanently invested abroad; repatriation could create additional U.S. tax liability. Management stated that environmental and other legal matters were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- On April 24, 2014, the company amended its charter to increase authorized common shares for possible future issuance.
Important facts for investors to verify
- Whether the steep Lifestyle Group decline persists and how the segment’s profit recovers.
- Whether improved earnings are sustained as acquisition-integration costs normalize, and how much of the year-over-year improvement reflects lower prior-year charges.
- Working-capital conversion, inventory levels and the persistence of negative operating cash flow.
- Debt reduction, revolver use and covenant headroom, particularly given substantial debt and cash largely held overseas.
- Any changes to consumer demand, foreign-exchange exposure, tax assumptions, repurchase activity or the company’s outlook in subsequent filings.