Wolverine World Wide, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended October 1, 2022, with year-to-date results compared with the periods ended October 2, 2021. The filing is for 2022 Q3, notwithstanding the request metadata’s 2021 Q3 label. Wolverine designs, markets and licenses footwear, apparel and accessories, including Merrell, Saucony, Sperry and Sweaty Betty.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Year to date 2022 | Year to date 2021 |
|---|---|---|---|---|
| Revenue | $691.4 million | $636.7 million | $2,019.8 million | $1,779.3 million |
| Gross margin | 40.2% | 43.2% | 41.9% | 43.1% |
| Operating profit | $58.8 million | $42.5 million | $246.3 million | $164.4 million |
| Net earnings attributable to Wolverine | $39.0 million | $0.0 million | $173.3 million | $83.2 million |
| Diluted EPS | $0.48 | $0.00 | $2.12 | $0.98 |
| Operating cash flow | Not separately provided | Not separately provided | $(490.2) million | $17.0 million |
- Revenue and segments: Q3 revenue rose 8.6%; Michigan Group revenue increased 20.1% to $390.2 million, while Boston Group revenue fell 4.3% to $247.7 million. Year-to-date revenue rose 13.5%. Sweaty Betty contributed $37.8 million of Q3 revenue and $138.7 million year-to-date; year-to-date growth also reflects its acquisition in August 2021.
- Profitability: Q3 gross margin declined 300 basis points, mainly due to outbound freight, greater direct-to-consumer promotions and an unfavorable international-channel mix. Year-to-date operating profit includes a $90.0 million gain from the sale of Champion footwear trademarks. Q3 environmental and related costs were $2.2 million; year-to-date costs were $32.6 million.
- Cash flow and working capital: Year-to-date operating cash use was driven chiefly by a $533.5 million inventory increase and a $133.5 million increase in receivables. Inventory was $880.9 million at quarter-end, up $468.9 million, or 113.8%, from the prior-year quarter. The company reported $280.9 million of inventory in transit.
- Debt and liquidity: Total debt was $1,475.2 million, up from $966.8 million at January 1, 2022; cash was $136.4 million. Revolving-facility availability was $254.4 million. The company reported compliance with its credit-facility covenants. Variable-rate debt was $932.5 million, with a swap effectively fixing $240.6 million.
- Other: Q3 net interest expense was $12.5 million, versus $9.6 million. The company declared dividends of $0.10 per share in the quarter and repurchased $81.3 million of shares year to date.
Material changes and management commentary
- Supply-chain transit times improved sooner than planned, contributing to elevated inventory and distribution-center processing pressures. Management increased Q3 promotions and expected promotional activity to remain elevated in Q4 to reduce inventory.
- Inflation-related logistics, labor and other costs, along with a stronger U.S. dollar, pressured results. Management expected inflationary cost pressure to continue adversely affecting Q4 results and said it had implemented selective price increases.
- Management stated that operating cash flow was expected to meet working-capital needs for the foreseeable future; excess cash flow was expected to support growth, debt reduction, dividends and general corporate purposes. No numerical earnings or revenue guidance is provided in the supplied filing text.
- On November 9, 2022, the company announced new reportable segments—Active, Work and Lifestyle—to be reflected in its 2022 year-end financial statements.
Risks, contingencies and unusual items
- Environmental matters: The company reported a $64.4 million remediation reserve, including $30.9 million expected to be paid within 12 months and $33.5 million over as long as 25 years. The reserve and future costs may change with new information, regulatory standards, remediation requirements or allocation of liability. The company recorded $37.8 million of liabilities for certain litigation matters and made related payments of $50.1 million year to date. A proposed class-action settlement had preliminary court approval, with a final approval hearing scheduled for March 29, 2023; one separate landfill-related lawsuit remained pending.
- Inventory and demand: Elevated inventory and planned promotions may weigh on margins; the filing cites softer consumer demand and supply-chain issues affecting Sperry and Keds.
- Foreign exchange and interest rates: Currency movements reduced revenue by $22.9 million in Q3 and $48.2 million year to date; currency translation reduced foreign net assets by $100.0 million year to date. Higher average variable-rate borrowings contributed to increased interest expense.
- Other exposures: The filing identifies COVID-19 and supply-chain disruption, inflation, consumer spending, competition, brand performance, inventory management and foreign sourcing among material risks. Russia operations were temporarily suspended and represented less than 1% of revenue.
Important facts for investors to verify
- Whether inventory normalizes and planned promotions reduce stock without further material margin erosion.
- How operating cash flow and borrowing needs change as inventory is sold and receivables are collected.
- Potential changes to environmental remediation reserves and the status and cost of pending settlements or litigation.
- The effects of foreign exchange and variable interest rates on revenue, earnings and debt service.
- How results and comparability are affected by the Champion trademark gain, Sweaty Betty acquisition and upcoming segment reorganization.