Wolverine World Wide, Inc. — Form 10-Q
Reporting period: The filing covers the quarter ended July 3, 2021, and the first two fiscal quarters of 2021. This differs from the “2020 Q2” period in the request metadata. Comparisons are with the quarter ended June 27, 2020 and the corresponding year-to-date period.
Business context and results
Wolverine designs, markets and licenses footwear, apparel and accessories through its brand portfolio, wholesale and consumer-direct channels, and international partners. Its reportable segments are Wolverine Michigan Group and Wolverine Boston Group. Management attributed much of the sharp year-over-year growth to recovery from pandemic-related disruption and store closures in the prior-year comparison.
- Revenue: Q2 revenue was $631.9 million, up 81.0%; first-half revenue was $1,142.6 million, up 44.9%. Foreign exchange added $11.6 million to Q2 revenue and $20.2 million to first-half revenue.
- Segment revenue: Q2 Michigan Group revenue increased 63.0% to $354.4 million; Boston Group revenue increased 110.6% to $258.0 million. First-half increases were 40.2% and 50.7%, respectively.
- Gross profit and margin: Q2 gross profit was $270.4 million and gross margin was 42.8%, versus 42.2% a year earlier. First-half gross profit was $492.7 million and margin was 43.1%, versus 41.7%.
- Operating profit: Q2 operating profit was $63.8 million, compared with $7.5 million; first-half operating profit was $121.9 million, compared with $24.4 million. Q2 operating margin was approximately 10.1%, versus 2.1%.
- Earnings: Q2 net earnings attributable to Wolverine were $44.7 million, or $0.53 per diluted share, versus a $1.6 million loss, or $0.02 loss per share. First-half attributable earnings were $83.2 million, or $0.98 per diluted share, versus $11.4 million, or $0.14 per share.
- Cash flow: First-half operating cash flow was $51.7 million, versus $39.0 million. Investing activities used $8.1 million, including $6.7 million of capital expenditures; financing activities used $45.1 million. Q2 operating cash flow was $25.4 million, versus $115.6 million.
- Liquidity and debt at July 3: Cash was $345.8 million; debt was $718.4 million, compared with $722.5 million at January 2, 2021 and $1,024.4 million at June 27, 2020. The company reported $793.9 million of available revolving-credit capacity, net of letters of credit, and compliance with credit-facility covenants.
- Other metrics: Inventory was $331.7 million, up from $243.1 million at fiscal year-end but down $54.8 million from the prior-year quarter. The company declared $0.10 per share in Q2 dividends.
Material changes and management commentary
- Growth reflected broad improvement across brands and channels against a pandemic-affected prior-year period. Owned eCommerce revenue declined 2.7% in Q2 versus a prior-year period that benefited from physical-store closures, but increased 24.6% for the first half.
- Q2 gross margin benefited from product mix, average selling prices and direct-to-consumer mix, but incremental air freight costs reduced margin by 320 basis points. First-half air freight costs reduced margin by 190 basis points.
- Supply-chain disruption, including vessel and container shortages and U.S. port congestion, delayed inventory and wholesale shipments. The company reported $11.0 million of incremental air freight expense in Q2 and $15.0 million in the first half, and expected some disruption to continue through the rest of fiscal 2021.
- Management said operating cash flow was expected to meet working-capital needs for the foreseeable future; excess cash was expected to support growth, debt reduction, dividends and acquisitions. The filing provides no numeric earnings or revenue guidance.
- Subsequent event: On August 2, 2021, the company completed its $415.8 million acquisition of the Sweaty Betty activewear business, funded with cash on hand and revolver borrowings. This transaction occurred after the balance-sheet date and changes the liquidity and debt picture reported at July 3.
Risks, contingencies and unusual items
- COVID-19 remained a material source of uncertainty for demand, operations, financial results and liquidity. Other disclosed risks include supply-chain capacity and shipping constraints, inventory management, consumer preferences, foreign exchange, competition and customer relationships.
- Environmental matters: The company reported a $93.1 million remediation reserve at July 3, including $24.8 million expected to be paid within 12 months and $68.3 million expected over as long as 25 years. A consent decree caps the company’s contribution toward a municipal water-system extension at $69.5 million, alongside other remediation and monitoring obligations. The company said future estimates could change materially.
- Separate PFAS-related individual and putative class-action claims remain pending. The company said it could not conclude that adverse verdicts were probable and had recorded no reserve for those claims; it intends to defend itself. It is also pursuing insurance recoveries.
- The Q2 environmental and other related expense was $4.8 million, compared with a $3.9 million net recovery in the prior-year quarter. In Q4 2020, the company recorded a $222.2 million impairment of the Sperry trade name; it reported no impairment trigger at July 3 but cautioned that future deterioration could require another noncash impairment.
Important facts for investors to verify
- How much of the reported growth reflects underlying demand versus recovery from the unusually weak, pandemic-affected comparison period?
- Whether shipping constraints and air freight costs continue to delay shipments or pressure margins in the remainder of 2021.
- The post-acquisition cash, revolver borrowings, total debt and integration costs following the Sweaty Betty purchase.
- Whether the $93.1 million environmental reserve remains adequate as remediation work, regulatory requirements and litigation develop.
- Whether performance at Sperry and the assumptions underlying its trade-name valuation support the reported carrying value.