Business context and reporting period
Wolverine World Wide, Inc. designs, sources, markets, licenses and distributes branded footwear, apparel and accessories, including Merrell, Wolverine, Hush Puppies and Bates. This unaudited Form 10-Q covers the 12-week second quarter and 24 weeks ended June 19, 2010; comparisons are with the corresponding periods ended June 20, 2009. Dollar amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q2 2010 | Q2 2009 | First 24 weeks 2010 | First 24 weeks 2009 |
|---|---|---|---|---|
| Revenue | $258.2 | $246.4 | $543.1 | $501.8 |
| Gross profit / margin | $103.7 / 40.2% | $92.0 / 37.3% | $221.3 / 40.7% | $195.0 / 38.9% |
| Operating profit | $24.7 | $12.3 | $63.2 | $27.8 |
| Net earnings | $17.2 | $7.9 | $44.7 | $18.4 |
| Diluted EPS | $0.35 | $0.16 | $0.89 | $0.37 |
- Q2 revenue rose 4.8%; first-half revenue rose 8.2%. First-half growth included $9.6 million from foreign currency translation and $24.0 million from volume and selected price increases.
- Net cash from operating activities was $10.3 million for the first 24 weeks, versus $41.9 million a year earlier. Capital expenditures were $5.1 million. Working-capital investment and the timing of tax and operating-expense payments outweighed stronger earnings and lower restructuring cash payments.
- Cash was $110.1 million at June 19, down $50.3 million from January 2, 2010. Current assets were $483.9 million and current liabilities $117.9 million. Interest-bearing debt was approximately $1.0 million, with no revolver borrowings.
- A new revolving credit facility provides up to $150 million, with potential expansion to $225 million under certain circumstances. The company reported covenant compliance and said cash and the facility should meet foreseeable working-capital needs.
- Six-month financing cash outflows included $48.1 million for treasury-share purchases and $10.8 million for dividends. The quarterly dividend was $0.11 per share.
Material changes versus the prior comparable period
- Q2 gross margin increased 290 basis points; first-half margin increased 180 basis points. Management attributed improvement to fewer closeout sales, lower product costs, higher selling prices, restructuring benefits and, for the half-year, a favorable sales mix. Higher freight costs partly offset Q2 gains.
- Q2 net earnings increased 117.7%, and first-half net earnings increased 142.9%. Lower restructuring costs and a lower effective tax rate contributed alongside revenue and margin growth. The effective tax rate was 29.0%, compared with 32.3%, reflecting international tax-planning strategies.
- First-half operating cash flow declined despite higher earnings, principally because of working-capital movements. Inventory was 7.0% below the prior-year quarter; receivables were nearly flat despite revenue growth, aided by strong collections.
- The company repurchased about 1.637 million shares in the first half. The prior repurchase authorization was exhausted in Q1; a new program authorizes up to $200 million over four years.
Outlook, commentary, risks and unusual items
- No quantified revenue or earnings guidance is provided in the supplied filing text. Management described robust organic growth, while noting expected lower closeout sales and a significant distributor shipment delayed into the subsequent quarter. It also cited planned brand-building and sales-force investments.
- The strategic restructuring plan, including facility consolidation and product-creation realignment, was substantially completed by June 19, 2010, except for certain cash payments. First-half restructuring and transition costs were $4.2 million, versus $22.4 million in the prior-year period; Q2 costs reduced diluted EPS by $0.04, versus $0.11.
- Brand results were mixed: Outdoor and Wolverine Footwear grew in Q2, while Heritage and Hush Puppies declined modestly. Retail and e-commerce and the Wolverine Leathers business showed growth; the retail store count was 84, down from 93 a year earlier.
- Key risks disclosed include changes in consumer demand and economic conditions, competition and pricing, inventory forecasting, customer concentration or cancellations, sourcing and input costs, foreign-exchange movements, pension funding, licensed-brand rights, restructuring execution, and international trade or geopolitical disruptions. Foreign-exchange forward contracts with $91.9 million notional value were outstanding; the company said hedge ineffectiveness was not material.
- Environmental, employment, intellectual-property and other routine legal matters were not expected by management to materially affect financial position, results or cash flows. The company cannot calculate maximum potential payments under certain lease indemnities. Future minimum royalty and advertising commitments are disclosed in the notes.
Investor facts to verify
- Whether the delayed distributor shipment was completed in the subsequent quarter and how closeout sales affected later revenue and margins.
- Whether working-capital investment reversed and operating cash flow improved after the first-half decline.
- Progress and cash costs remaining after the restructuring plan, and whether its stated operating benefits persisted.
- Repurchase activity, remaining authorization and the effect of buybacks on cash and share count.
- Performance by brand and channel, particularly the growth sustainability of Outdoor, consumer-direct and newer brands, alongside weaker markets and brands.
- Exposure to foreign exchange, pension funding, legal or environmental matters, and compliance with the new credit facility’s covenants.