Wolverine World Wide, Inc. — Q1 2011 Form 10-Q
Reporting period: First 12 weeks ended March 26, 2011; comparisons are to the 12 weeks ended March 27, 2010. Dollar amounts are in millions unless stated otherwise. Wolverine designs, sources, markets and licenses branded footwear, apparel and accessories across 12 brands and approximately 190 countries and territories.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $330.9 | $284.9 | +16.1% |
| Gross profit / margin | $137.8 / 41.6% | $117.6 / 41.3% | +17.2%; margin +0.3 percentage points |
| Operating profit | $49.5 | $38.5 | +28.4% |
| Net earnings / net margin | $35.9 / 10.8% | $27.5 / 9.6% | +30.5% |
| Diluted EPS | $0.72 | $0.54 | +33.3% |
| Operating cash flow | $(82.8) | $(43.5) | Outflow increased $39.3 |
| Capital expenditures | $4.3 | $2.2 | Up $2.1 |
Gross margin improvement reflected the absence of prior-year restructuring and transition costs, selling-price increases and a modest favorable foreign-exchange effect; higher product costs, mix and a reserve related to a U.S. military Bates boot program partly offset those benefits. Operating expenses were $88.3 million, or 26.7% of revenue, versus $79.0 million, or 27.7%, including $0.5 million of prior-year restructuring and transition costs. The effective tax rate declined to 28.0% from 29.0%, partly due to the U.S. research and development tax credit and a more favorable geographic mix of taxable income.
Cash and equivalents were $91.6 million at March 26, down from $150.4 million at January 1, but up $6.7 million from March 2010. Operating cash use reflected an $31.8 million pension contribution (versus $10.4 million a year earlier) and working-capital investment, including receivables and inventory growth. Inventory was $250.0 million, up 45.5% year over year; management cited advance core-product purchases ahead of supplier price increases, new collections and expected business growth. Receivables were $251.9 million, up 21.3% year over year.
Interest-bearing debt was $30.5 million, including $30.0 million drawn on the revolver, versus $1.0 million at both prior comparison dates. The revolving facility provides $150 million of capacity, potentially expandable to $225 million; the company reported compliance with its covenants. Management said cash, operating cash flow and revolver access should meet foreseeable working-capital needs. Stockholders’ equity was $585.7 million. The company declared a $0.12 per-share dividend, compared with $0.11, and repurchased approximately 142,000 shares for $5.1 million.
Material changes and operating drivers
- Branded footwear, apparel and licensing revenue rose 16.3% to $304.3 million; other business units rose 14.2% to $26.6 million. Management attributed most branded growth to organic unit growth and selected price increases; foreign exchange added $2.8 million to reported revenue.
- Outdoor Group revenue increased 21.7% to $138.1 million; Heritage Group rose 18.3% to $111.1 million. Lifestyle Group grew 1.2% to $52.0 million, with Hush Puppies’ declines offset in part by growth in other brands. International revenue was 40.7% of total, versus 41.1%.
- Net earnings increased $8.4 million. Diluted EPS growth also reflected lower restructuring costs and fewer shares outstanding; Q1 2010 included $0.02 per diluted share of restructuring and transition costs.
- The company reported no Q1 2011 restructuring or transition expense; the prior-year period included $1.5 million in total such costs. Most restructuring actions were completed in 2010.
- The company realigned its branded operations into Outdoor, Heritage and Lifestyle groups in January 2011. It reported one reportable segment. It operated 91 retail stores and 41 consumer-direct internet sites at quarter-end.
Outlook, risks and contingencies
The filing gives no specific numerical revenue, earnings or EPS guidance. Management cited a positive outlook for fiscal 2011 and said inventory was positioned to support growth and new collections. It also noted investments in marketing, selling capacity and product development. These statements are not quantified forecasts.
Key disclosed risks include economic and consumer-demand changes; foreign-exchange, interest-rate and credit-market movements; costs and availability of materials, labor and manufacturing capacity; customer or military-contract losses or cancellations; shipping-port interruptions; competition and changing preferences; regulatory, legal and intellectual-property matters; pension funding; and risks associated with international operations and acquisitions or other strategic initiatives. The company uses foreign-currency forward contracts to hedge certain U.S.-dollar inventory purchases; $111.7 million notional value was outstanding, with maturities up to 336 days.
Wolverine is involved in environmental and other routine legal matters, including employment and intellectual-property claims. Management stated that these matters were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty and some environmental liabilities are not yet fixed. Minimum future royalty and advertising obligations are disclosed, including $1.7 million of 2011 minimum royalties and $2.1 million of 2011 minimum advertising obligations. Management reported effective disclosure controls and no material change to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and improved margins persist, particularly in Outdoor and Heritage, and whether Lifestyle weakness continues.
- Whether inventory growth converts into sales without markdowns or further margin pressure, and whether receivables are collected as expected.
- How pension contributions and working-capital needs affect cash generation; Q1 operating cash flow was materially negative despite higher earnings.
- Revolver usage, available borrowing capacity and covenant compliance as seasonal working-capital needs change.
- The impact of the Bates military-program reserve, foreign-exchange exposure, and disclosed legal, environmental and license-related obligations.
- Whether management provides subsequent quantified guidance; this filing contains no numerical full-year forecast.