Wolverine World Wide, Inc. — Form 10-K Summary
Period clarification: The request identifies “2021 Q4,” but this filing is the annual report for the fiscal year ended December 31, 2022. Fiscal 2021 ended January 1, 2022; both years contained 52 weeks.
Business context
Wolverine designs, markets and licenses footwear, apparel and accessories through brands including Merrell, Saucony, Sweaty Betty, Wolverine, Cat, Sperry and Hush Puppies. Products are sold in approximately 170 countries through wholesale, licensing, distribution, joint ventures and direct-to-consumer channels. Fiscal 2022 reporting groups were Active, Work and Lifestyle.
Financial performance and liquidity
| Metric | Fiscal 2022 | Fiscal 2021 |
|---|---|---|
| Revenue | $2,684.8 million | $2,414.9 million |
| Gross profit / gross margin | $1,070.4 million / 39.9% | $1,029.9 million / 42.6% |
| Operating profit (loss) | $(208.4) million | $155.7 million |
| Net earnings (loss) attributable to Wolverine | $(188.3) million | $68.6 million |
| Diluted earnings (loss) per share | $(2.37) | $0.81 |
| Cash from (used in) operating activities | $(178.9) million | $86.8 million |
Revenue rose 11.2%; foreign exchange reduced 2022 revenue by $70.0 million. Gross margin declined 270 basis points, reflecting product mix, higher promotions and closeout activity. The net loss included $428.7 million of goodwill and intangible-asset impairment charges, partly offset by a $90.0 million gain on the Champion trademark sale. The effective tax rate was 25.2%, versus 16.6%.
Active revenue increased 19.0% to $1,570.2 million, but operating profit fell 13.6% to $198.4 million. Work revenue increased 7.6% to $590.5 million while operating profit decreased 1.3% to $102.5 million. Lifestyle revenue declined 6.2% to $447.5 million and operating profit fell 28.7% to $48.1 million.
At year-end, the balance sheet reported $131.5 million of cash and cash equivalents, $745.2 million of inventory and $1,158.0 million of debt, compared with $161.7 million, $365.5 million and $966.8 million, respectively, at the prior year-end. The cash-flow statement’s $135.5 million ending cash figure includes $4.0 million classified as held for sale. Available Revolving Facility capacity was $569.3 million. The company reported compliance with its credit covenants. Cash dividends were $0.40 per share for the year.
Material changes, outlook and unusual items
- Inventory increased $379.7 million, or 103.9%, year over year. Management attributed elevated levels to supply-chain transit times improving faster than planned and distribution-center capacity pressures. Inventory in transit was $146.8 million at year-end, down from $280.9 million on October 1, 2022.
- Management said promotional activity increased in the second half of 2022 and expected elevated promotions to continue in the first half of 2023 to reduce inventory. It also expected the stronger U.S. dollar to weigh on 2023 results. The filing does not provide a full-year numerical 2023 earnings or revenue forecast.
- The company recognized $191.0 million of impairment on the Sperry trade name, $189.3 million on the Sweaty Betty trade name and $48.4 million on Sweaty Betty goodwill. Management cited lower future cash-flow assumptions and/or higher discount rates; further impairment remains a risk if assumptions or conditions deteriorate.
- Supply-chain disruption, higher freight and labor costs, inflation and wholesale order cancellations affected operations. The company used selective price increases to partly offset inflation and temporarily suspended business operations in Russia in March 2022; Russia represented less than 1% of revenue.
- The company sold the Champion footwear trademarks in the U.S. and Canada for $90.0 million in June 2022. After year-end, it sold the global Keds business for approximately $83.6 million, effective February 4, 2023. Wolverine Leathers was classified as held for sale and the company had initiated a divestiture process.
- Environmental matters remain material: the year-end remediation reserve was $74.1 million, including $49.8 million expected to be paid within 12 months. The company also recorded a $40.5 million accrual for certain litigation matters. The filing notes that future developments could materially change cost estimates and that losses beyond established remediation reserves could not be estimated for certain ongoing sites.
- Other risks include consumer-demand and competition pressures, inventory valuation, dependence on third-party manufacturing concentrated in Asia-Pacific, foreign exchange and interest rates, customer credit and order changes, cybersecurity, and litigation. The auditor gave an unqualified opinion on the financial statements and reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether management reduces elevated inventory without further material discounting, margin pressure or write-downs.
- Actual operating cash generation and working-capital trends, including the effect of receivables sales and inventory normalization.
- Debt levels, borrowing costs, covenant headroom and the ability to meet near-term maturities and other obligations.
- Whether the impairment assumptions for Sperry and Sweaty Betty remain supportable and whether additional impairment is required.
- Developments in PFAS remediation and litigation, including payments, insurance recoveries and any changes to reserves or potential exposure.
- Completion and financial effects of the Keds sale and any planned Wolverine Leathers divestiture.