Wolverine World Wide, Inc. — Q3 2010 Form 10-Q
Reporting period: Third 12-week accounting period ended September 11, 2010; year-to-date covers 36 weeks. Comparisons are with the periods ended September 12, 2009, unless noted. Dollar amounts below are in millions except per-share data.
Business context
Wolverine designs, sources, markets, licenses and distributes footwear, apparel and accessories across a global brand portfolio. Its principal reportable segment is branded footwear, apparel and licensing; other operations include retail, e-commerce, leather and pigskin procurement. The company operated 87 stores and 32 consumer-direct websites at quarter-end.
Financial performance
| Metric | Q3 2010 | Q3 2009 | 36 weeks 2010 | 36 weeks 2009 |
|---|---|---|---|---|
| Revenue | $320.4 | $286.8 | $863.5 | $788.5 |
| Gross profit | $128.6 | $114.0 | $349.8 | $308.9 |
| Gross margin | 40.1% | 39.7% | 40.5% | 39.2% |
| Operating profit | $47.9 | $36.2 | $111.1 | $64.0 |
| Net earnings | $34.1 | $26.8 | $78.8 | $45.2 |
| Diluted EPS | $0.70 | $0.54 | $1.59 | $0.91 |
| Operating cash flow | Not separately stated | Not separately stated | $7.7 | $71.1 |
- Q3 revenue rose 11.7%; year-to-date revenue rose 9.5%. Q3 branded footwear, apparel and licensing revenue increased 10.3%; other business-unit revenue increased 27.1%.
- Q3 net earnings increased 27.2% and diluted EPS increased 29.6%. Year-to-date net earnings rose 74.3% and diluted EPS rose 74.7%.
- Gross margin improved 40 basis points in Q3 and 130 basis points year to date. Drivers included product mix, selected price increases, fewer closeout sales and reduced restructuring costs; higher product and freight costs partly offset Q3 gains.
- Q3 SG&A was $80.7, up 9.1%, reflecting brand-building, sales-force and product-development investments. Year-to-date operating expenses fell 2.5%, mainly because restructuring and transition costs declined by $20.0.
Financial position and liquidity
- At September 11, cash and equivalents were $95.3, accounts receivable $238.5, inventory $208.5, current assets $562.2 and current liabilities $164.2. Cash was down $65.1 from fiscal year-end but up $16.8 from September 2009.
- Interest-bearing debt was approximately $1.0, with no revolver borrowings; the company had a $150.0 revolving facility, potentially expandable to $225.0. It reported compliance with debt covenants.
- Year-to-date operating cash flow was $7.7 versus $71.1 a year earlier. Increased receivables and inventory, along with timing of tax and operating-expense payments, more than offset stronger earnings and lower restructuring payments. Inventory rose 13.3% year over year; management attributed this to growth, lower reserves and purchases ahead of expected core-product cost increases.
- Year-to-date capital expenditures were $9.4. Financing used $59.5, including $52.2 of treasury-stock purchases and $16.1 of dividends, partly offset by stock-plan proceeds. The company repurchased about 1.795 million shares year to date; $154.1 remained under its $200.0 four-year repurchase authorization at quarter-end.
Material changes, outlook and risks
- Growth was broad across brands, with particularly strong Q3 increases in Wolverine Footwear, Heritage Brands, and other business units. Management also cited third-party factory delays and a significant distributor shipment shifted from Q2 to Q3; the timing benefit partly offset delayed shipments.
- The 2009 restructuring plan was substantially completed by June 19, 2010, apart from certain cash payments. No restructuring or transition costs were recorded in Q3 2010; year-to-date costs were $4.2 versus $27.5 in the prior-year period. The remaining restructuring reserve was $3.1.
- No specific numerical revenue or earnings guidance is provided in the supplied filing text. Management expected the revolver and operating cash flows to be sufficient for foreseeable working-capital needs and said excess cash could support investment, growth, dividends, debt repayment or repurchases.
- Key exposures include consumer demand and economic conditions, competition and pricing, inventory forecasting, factory capacity and delays, material and freight costs, customer concentration or cancellations, foreign-exchange movements, pension funding, and execution of growth and restructuring initiatives. The company hedges certain foreign-currency inventory purchases; outstanding forward contracts had a $76.0 notional value and maturities up to 308 days.
- Management said environmental claims and routine litigation were not expected to have a material adverse effect. Lease indemnity guarantees have an unquantifiable maximum potential payment; minimum royalty and advertising commitments also extend into future years.
- Management concluded disclosure controls were effective at period-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Q3 growth and the distributor shipment timing shift are sustainable, and how factory delays affect subsequent quarters.
- Whether inventory growth and working-capital investment convert into sales and stronger operating cash flow; year-to-date cash generation was substantially below the prior year.
- How higher product, freight and other input costs affect margins, particularly given planned early inventory purchases and management’s pricing actions.
- The pace and cost of future share repurchases and dividends relative to cash generation and growth-investment needs.
- Potential developments in pension obligations, foreign-exchange exposure, legal matters and other contingencies; the filing does not quantify the maximum exposure under lease guarantees.