Wolverine World Wide, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 12 weeks and 36 weeks ended September 12, 2015, not 2014 Q3 as stated in the request metadata. It compares against periods ended September 6, 2014.
Business context and reporting period
Wolverine designs, sources, markets and sells footwear, apparel and accessories through a portfolio of 15 owned and licensed brands, including Merrell, Saucony, Sperry and Wolverine. It also operates consumer-direct and leather businesses. The company reported results for its third fiscal quarter and first 36 weeks of fiscal 2015.
Key financial metrics
| Metric | 12 weeks ended Sep. 12, 2015 | Prior-year comparable | 36 weeks ended Sep. 12, 2015 | Prior-year comparable |
|---|---|---|---|---|
| Revenue | $678.9 million | $711.1 million | $1,940.4 million | $1,952.2 million |
| Gross margin | 40.0% | 40.0% | 40.2% | 40.3% |
| Operating profit / margin | $75.9 million / 11.2% | $87.6 million / 12.3% | $187.1 million / 9.6% | $200.3 million / 10.3% |
| Net earnings attributable to Wolverine | $45.8 million | $57.8 million | $111.2 million | $122.4 million |
| Diluted EPS | $0.44 | $0.57 | $1.08 | $1.20 |
| Operating cash flow | Not separately provided | Not separately provided | $109.8 million | $114.7 million |
For the 36 weeks, investing cash outflow was $32.9 million, including $28.6 million in capital expenditures; financing cash outflow was $98.8 million. Operating cash flow less capital expenditures was $81.2 million, a derived measure, versus $93.3 million in the prior-year period. Cash was $196.4 million at September 12, 2015, down from $223.8 million at fiscal year-end. Total debt was $825.6 million, down from $900.8 million at fiscal year-end; cash less total debt was approximately $629.2 million, a derived measure. Current assets were $1,134.2 million and current liabilities $363.3 million. The company had $496.4 million of available revolving-credit capacity.
Material changes versus prior comparable periods
- Third-quarter revenue fell 4.5% and attributable net earnings fell 20.8%; diluted EPS declined 22.8%. For the first 36 weeks, revenue declined 0.6%, net earnings 9.2%, and diluted EPS 10.0%.
- Management attributed quarterly revenue pressure principally to unfavorable foreign exchange, retail-store closures under the consumer-direct realignment, and the exit from Patagonia footwear. Foreign exchange reduced reported revenue by about $20.0 million in the quarter and $50.8 million year to date.
- Quarterly gross margin held at 40.0%, but operating margin declined 110 basis points. Management cited lower revenue, higher pension expense and incremental brand investment.
- Lifestyle revenue fell 9.8% for the quarter, Performance fell 3.1%, and Heritage fell 0.7%; year-to-date Heritage revenue rose 4.7%, while Lifestyle fell 4.2% and Performance was nearly flat.
- Pension expense rose to $6.4 million for the quarter from $3.0 million and to $19.3 million year to date from $8.9 million. The year-to-date effective tax rate increased to 29.0% from 27.1%.
Outlook, management commentary, risks and unusual items
- The filing gives no quantified revenue or earnings guidance. Management said operating results and its outlook had reduced the fair-value cushion on the Stride Rite trade name; further operating declines could trigger a non-cash impairment. Its carrying value was $17.5 million.
- The 2014 consumer-direct realignment is expected to close about 120 stores by year-end 2015. Estimated pretax charges increased to $41 million–$45 million from an original $26.6 million–$32 million estimate; remaining charges were expected through Q1 2016. Management expects annual pretax benefits of approximately $12.5 million after implementation.
- The company recorded $4.1 million in 2015 restructuring and impairment costs related to winding down Cushe, including a $2.6 million indefinite-lived intangible impairment. It also incurred $1.6 million of debt-extinguishment costs for its refinancing.
- On July 13, 2015, the company refinanced with a $450 million Term Loan A and a $500 million revolving facility, both maturing July 2020. It reported compliance with all credit-agreement covenants. The $375 million public bonds bear 6.125% interest and mature in 2020.
- Operating cash flow was affected by seasonal working-capital use; accounts receivable and inventory increased by $68.3 million and $91.7 million, respectively, over the 36-week period. The company said cash flow and potential revolver borrowings should meet foreseeable working-capital needs.
- Key disclosed risks include foreign exchange, consumer demand and product mix, seasonality and weather, customer and supplier conditions, competition, consumer-direct execution, pension costs, intellectual-property and legal matters, and potential impairment. The company also noted that repatriation of foreign earnings treated as permanently reinvested could create material U.S. tax costs.
- Management stated that routine environmental and other legal matters were not expected to have a material adverse effect. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers fiscal 2015 Q3, despite the request metadata specifying 2014 Q3.
- Track Stride Rite performance and whether further declines result in an intangible-asset impairment.
- Monitor execution, remaining costs and realized savings from the store-closure and consumer-direct realignment plan.
- Assess whether inventory and receivables growth unwind as seasonal working capital normalizes, and review cash generation against capital spending and shareholder returns.
- Review debt reduction, refinancing terms, covenant headroom and the amount of cash held overseas.
- Evaluate continued foreign-exchange pressure, segment trends, higher pension costs and the elevated effective tax rate.