Wolverine World Wide, Inc. — Form 10-Q Summary
Period note: The request metadata says 2015 Q2, but this filing reports the 12 weeks and 24 weeks ended June 18, 2016, with comparisons to periods ended June 20, 2015.
Business context and reporting period
Wolverine designs, sources, markets and sells footwear, apparel and accessories through a portfolio of owned and licensed brands, distributors, retail stores and websites. It reported four operating groups: Outdoor & Lifestyle, Boston, Heritage and Multi-Brand. The company operated 356 stores in the U.S. and Canada and 54 consumer-direct websites as of June 18, 2016.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | First 24 weeks 2016 | First 24 weeks 2015 |
|---|---|---|---|---|
| Revenue | $583.7 million | $630.1 million | $1,161.3 million | $1,261.5 million |
| Gross margin | 38.8% | 39.1% | 39.2% | 40.3% |
| Operating profit | $41.8 million | $47.6 million | $75.8 million | $111.2 million |
| Net earnings attributable to Wolverine | $24.0 million | $25.3 million | $41.4 million | $65.4 million |
| Diluted EPS | $0.24 | $0.24 | $0.42 | $0.63 |
- Q2 revenue declined 7.4%; first-half revenue declined 7.9%. Q2 diluted EPS was unchanged, while first-half diluted EPS fell 33.3%.
- For the first 24 weeks, operating cash flow was $72.8 million, versus $94.9 million a year earlier. Capital expenditures were $28.2 million versus $15.8 million; net cash used in investing was $26.0 million. Cash increased $27.6 million from year-end to $221.7 million.
- At June 18, 2016, total debt was $808.0 million, including $441.5 million under the Term Loan A Facility and $375.0 million of public bonds. Cash was $221.7 million; net debt was approximately $586 million. The company had $497.4 million of available revolving-credit capacity and reported compliance with its debt covenants.
- Current assets were $1,020.5 million and current liabilities were $331.0 million. Inventory was $439.3 million, down 2.9% from the prior-year quarter.
- Q2 dividends declared were $0.06 per share. The company repurchased 136,521 shares during the quarter at an average $17.94 per share.
Material changes versus the prior comparable periods
- Management attributed lower revenue to a challenging U.S. retail environment, unfavorable foreign exchange, store closures and the exit of the Cushe brand. Q2 currency effects reduced reported revenue by about $3.0 million; first-half effects reduced it by about $8.8 million.
- Q2 gross margin fell 30 basis points. Unfavorable currency and product mix were partly offset by price increases. First-half margin fell 110 basis points, reflecting currency, product mix and restructuring costs, partly offset by price increases.
- All four reportable groups had lower Q2 revenue. The steepest decline was Multi-Brand, down 14.5%; Boston fell 9.3%. Boston’s operating profit declined 21.4% in Q2, while Multi-Brand’s fell 38.1%.
- First-half restructuring and impairment costs rose to $12.5 million from $2.7 million, with a further $3.9 million classified in cost of goods sold. Lower pension, retail-store and incentive-compensation costs partly offset weaker sales and higher restructuring charges.
Outlook, commentary, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management expected operating cash flow and, if needed, revolver borrowings to meet working-capital needs for the foreseeable future; excess cash was expected to support growth, debt reduction, dividends, repurchases and acquisitions.
- The 2014 consumer-direct realignment was completed in Q1 2016. It involved closing 136 stores and is expected to generate about $16 million in annual pretax benefits. The remaining reserve was $4.5 million, expected to be settled in the remainder of fiscal 2016.
- Separate organizational changes generated $5.1 million of first-half restructuring costs; management estimated another $5 million to $6 million to complete them during the rest of fiscal 2016. The company also recorded $0.3 million related to winding down Cushe.
- Management said the first-half results met its financial plan, but warned that missing future revenue or profitability projections could result in impairment charges. Sperry’s indefinite-lived trade name had a carrying value of $586.8 million.
- Key disclosed risks include consumer demand and retail conditions, competition and brand relevance, inventory management, foreign exchange, sourcing and supply disruption, customer relationships, seasonality and weather, consumer-direct execution, military contract awards, tax changes and goodwill or intangible impairment. The company reported no material change in risk factors from its 2015 Form 10-K.
- Environmental and other legal matters were ongoing; management did not expect them to have a material adverse effect. Foreign earnings were intended to remain permanently reinvested; repatriation could create material U.S. tax costs.
Important facts for investors to verify
- Confirm the intended reporting year: the supplied filing is for Q2 2016, not Q2 2015.
- Track whether sales and margins stabilize, particularly in Boston and Multi-Brand, and whether currency and U.S. retail pressures persist.
- Assess restructuring execution, the expected $16 million annual benefit, remaining costs and any further impairment indicators for major trade names.
- Review cash generation against capital spending, debt service, shareholder returns and the company’s reliance on receivables sales and revolving-credit capacity.
- Monitor compliance with debt covenants, foreign-currency exposure, pension obligations and potential tax consequences of repatriating foreign earnings.