Wolverine World Wide, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2022 Q2, but this filing covers the quarter ended July 1, 2023. Prior-year comparisons are for the quarter ended July 2, 2022. The filing was signed August 10, 2023.
Business context and reporting period
Wolverine designs, markets and licenses footwear, apparel and accessories across brands including Merrell, Saucony, Wolverine, Sperry and Sweaty Betty. It sells through wholesale, owned retail and e-commerce channels and operates in approximately 170 countries and territories. The filing reports three segments: Active, Work and Lifestyle.
The company completed the sale of Keds effective February 4, 2023, and is exploring strategic alternatives for Sperry. Wolverine Leathers was classified as held for sale; the filing does not state that its sale was completed.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $589.1 million | $713.6 million | $1,188.5 million | $1,328.4 million |
| Gross margin | 38.7% | 43.0% | 39.0% | 42.8% |
| Operating profit | $46.1 million | $167.9 million | $91.4 million | $187.5 million |
| Net earnings attributable to Wolverine | $24.0 million | $124.6 million | $43.0 million | $134.3 million |
| Diluted EPS | $0.30 | $1.53 | $0.53 | $1.63 |
| Operating cash flow | Not separately stated for the quarter | $45.9 million | $(247.9) million |
Q2 revenue fell 17.4%; first-half revenue fell 10.5%. Q2 operating profit was approximately 7.8% of revenue, versus 23.5% a year earlier; the comparison is materially affected by the prior-year $90.0 million Champion trademark sale gain and current-period items described below. First-half operating profit was approximately 7.7% of revenue, versus 14.1%.
Q2 revenue declined across all segments: Active $383.3 million (down 10.5%), Work $117.8 million (down 15.6%) and Lifestyle $74.9 million (down 38.2%). Lifestyle was affected by Keds’ divestiture and weaker Sperry sales. First-half revenue declines were led by Lifestyle (down 30.1%) and Work (down 16.4%); Active was down 0.7%, including a $25.5 million increase from Saucony.
Financial position, cash flow and material changes
- At July 1, 2023, balance-sheet cash was $176.5 million; the cash-flow statement reports $180.1 million, including $3.6 million classified as held for sale. Total debt was $1,113.5 million, including $385.0 million of revolver borrowings. Available revolving capacity was $608.5 million.
- First-half operating cash flow improved to $45.9 million from cash used of $247.9 million a year earlier. Inventory reductions provided $100.3 million of cash; operating cash flow also reflected $41.0 million of environmental-related cash payments, net of recoveries and costs, as presented in the cash-flow reconciliation.
- Investing cash flow was $67.0 million, including $81.9 million of proceeds from Keds; capital expenditures were $14.2 million. Financing cash outflow was $65.8 million, including $16.4 million of dividends paid and $40.0 million of net revolver repayments.
- Inventory was $647.9 million, down $97.3 million from December 31, 2022, but $8.4 million above July 2, 2022. The company said excess inventory and distribution-center capacity pressures persisted.
- Interest expense rose to $16.1 million in Q2 and $31.9 million in the first half, attributed to higher average revolver borrowings and interest rates. The Term and Revolving Facilities’ weighted-average rate was 5.92% at July 1.
Outlook, commentary, risks and unusual items
- Management expected inventory levels and seasonal product flows to normalize by the end of fiscal 2023, as transit and purchasing timelines moved toward pre-pandemic levels. It said operating cash flow should be sufficient for working-capital needs for the foreseeable future. No specific revenue or earnings guidance is provided in the filing text.
- Management cited weaker consumer demand, retailer inventory overhang, promotional activity, inflation in freight, labor and product inputs, higher interest rates, recession concerns and adverse currency movements. These factors, together with promotional activity and product costs, drove Q2 gross-margin contraction of 430 basis points.
- On June 30, 2023, the company amended its credit agreement to provide near-term flexibility by adjusting the maximum leverage-ratio covenant through fiscal 2023; prior thresholds were scheduled to return in Q1 2024. The company reported compliance with covenants as of July 1.
- Q2 included a $15.6 million non-cash long-lived-asset impairment, mainly for corporate-office lease and property assets. First-half results included a $20.1 million Keds sale gain. Environmental and other related costs, net of recoveries, were a benefit of $29.4 million in Q2 and $30.3 million for the first half; the prior-year first half recorded $30.4 million of expense.
- Environmental remediation reserve was $46.4 million, including $24.4 million expected within 12 months. The company also recorded $27.2 million for certain PFAS-related litigation matters. Remediation and legal outcomes remain uncertain; the filing says future developments could materially change cost estimates.
- Prior-year impairment charges included $191.0 million for the Sperry trade name, $189.3 million for Sweaty Betty, and $48.4 million of Sweaty Betty goodwill. No triggering event requiring another impairment was identified at July 1, 2023, but management noted continued impairment risk if actual results or assumptions deteriorate.
- The company declared a $0.10-per-share quarterly dividend on August 2, 2023. It had not repurchased shares under its public repurchase program in the first half; the program had $366.5 million remaining and was stated to expire in September 2023.
Important facts for investors to verify
- Confirm the intended reporting period: this is a Q2 2023 filing, despite the request’s 2022 Q2 label.
- Track inventory normalization, promotional intensity and whether gross margins recover as management expected.
- Monitor debt, interest costs, covenant compliance and the return to pre-amendment leverage thresholds in Q1 2024.
- Follow the Sperry strategic-alternatives process and the status and terms of any Wolverine Leathers divestiture.
- Review developments in PFAS remediation and litigation, insurance recoveries, and the potential for reserve changes.