Wolverine World Wide, Inc. — Form 10-K Summary
Period clarification: The supplied filing is the annual report for the fiscal year ended December 31, 2016, not a 2015 Q4 filing. It also reports fiscal 2016 fourth-quarter results; that quarter comprised 16 weeks.
Business context and reporting period
Wolverine designs, sources, markets and distributes footwear, apparel and accessories through brands including Merrell, Sperry, Saucony, Wolverine, Bates, Keds and Stride Rite. Products are sold in about 200 countries and territories through wholesale, licensing, distribution and consumer-direct channels. In 2016, the company realigned its brand portfolio into four reportable groups: Outdoor & Lifestyle, Boston, Heritage and Multi-Brand.
Financial performance and liquidity
| Metric | Fiscal 2016 | Prior comparable period |
|---|---|---|
| Revenue | $2,494.6 million | $2,691.6 million in 2015; down 7.3% |
| Gross margin | 38.5% | 39.1% in 2015 |
| Operating profit | $159.9 million | $201.1 million in 2015; down 20.5% |
| Net earnings attributable to Wolverine | $87.7 million | $122.8 million in 2015; down 28.6% |
| Diluted earnings per share | $0.89 | $1.20 in 2015 |
| Cash provided by operating activities | $296.3 million | $215.5 million in 2015 |
| Cash and cash equivalents at year-end | $369.8 million | $194.1 million at prior year-end |
| Total debt at year-end | $820.7 million | $809.8 million at prior year-end |
- Fiscal 2016 capital expenditures were $55.3 million. Inventories fell 25.3% year over year, to $348.7 million.
- The company reported $597.4 million of available revolving credit capacity and compliance with its credit covenants at year-end.
- Operating cash flow improved mainly because of working-capital changes, including lower inventory and receivables; lower earnings partly offset that benefit.
- Fiscal 2016 dividends were $0.24 per share. The company said it expected comparable quarterly dividends in fiscal 2017, subject to debt-agreement restrictions.
- In fiscal 2016 Q4, revenue was $729.6 million and the company recorded a $1.9 million net loss attributable to Wolverine, compared with $751.2 million revenue and $11.6 million net earnings in Q4 2015.
Material changes versus prior year
- Revenue declined $197.0 million. Management cited store closures, foreign-exchange effects, the exit of the Cushe business and weaker demand. Store closures reduced revenue by $34.5 million; foreign exchange by $17.1 million; and the Cushe exit by $14.9 million.
- Gross margin fell 60 basis points. Foreign exchange, store closures and an unfavorable international sales mix were key pressures; product-cost reductions partly offset them.
- Revenue declined in all four operating groups: Outdoor & Lifestyle by 7.0%, Boston by 5.7%, Heritage by 6.3% and Multi-Brand by 13.4%. Chaco and Bates were areas of growth, while the Multi-Brand decline reflected Stride Rite store closures and lower U.S. wholesale sales.
- Operating expenses decreased $50.6 million to $800.0 million, with savings from store closures, lower pension expense, advertising and selling costs, partly offset by higher restructuring and impairment costs and incentive compensation.
- Cash flow from operations rose $80.8 million year over year, while debt increased $10.9 million.
Outlook, management commentary, risks and unusual items
- Restructuring: The 2016 consumer-direct realignment includes store closures. The company estimated total pretax charges of $43–$49 million, with remaining charges expected through fiscal 2017, and estimated annual pretax benefits of about $20 million once fully implemented. It closed 51 stores under the plan during 2016. The completed 2014 plan is expected to yield about $16 million in annual pretax benefits.
- Debt refinancing: The company issued $250 million of 5.000% senior notes due 2026 and redeemed $375 million of 6.125% public bonds due 2020, alongside additional term-loan borrowing. Fiscal 2016 included $18.1 million of debt-extinguishment and related costs, including a $13.1 million early-redemption premium.
- Impairments: The company recorded $7.1 million of Stride Rite trade-name impairment and $12.2 million of impairment charges on consumer-direct store assets in 2016. It reported no goodwill impairment.
- Backlog: Orders were approximately $980 million at February 11, 2017, versus $1,024 million at February 13, 2016. Most related to fiscal 2017 shipments; orders are cancellable and backlog may not predict actual shipments.
- Key risks: Management highlighted competition and changing consumer preferences, inventory forecasting, foreign exchange, tariffs and trade-policy uncertainty, reliance on overseas third-party sourcing, wholesale-customer and retail-channel pressures, consumer-direct store performance, weather, and government footwear contracts. Cybersecurity, privacy, pension and tax risks were also identified.
- Taxes and contingencies: The company had $527.9 million of unremitted foreign earnings for which no U.S. deferred tax liability was recorded, and stated that repatriation could create additional tax. Environmental and other litigation remained ongoing; management did not expect the matters described to have a material adverse effect, though certain environmental claims had not reached a stage where liability was fixed.
- Reporting change: Beginning in fiscal 2017, the fiscal year was to comprise four 13-week quarters.
Important facts for investors to verify
- Confirm the intended period: the provided 10-K covers fiscal 2016, while the request metadata specifies 2015 Q4.
- Assess whether the planned store closures deliver the estimated $20 million annual savings and whether restructuring charges remain within the stated range.
- Track demand, margins and inventory across the four operating groups, particularly Stride Rite, Merrell, Sperry and Saucony.
- Review debt maturities, interest costs, covenant headroom and the impact of the refinancing; year-end debt was $820.7 million.
- Evaluate the sustainability of stronger operating cash flow, including the role of working-capital releases and the receivables-sale program.
- Monitor foreign-exchange and trade-policy exposure, as well as the implications of permanently reinvested foreign earnings and potential repatriation taxes.