Wolverine World Wide, Inc. — Form 10-Q Summary
Business context and reporting period
Period: Quarter ended June 27, 2020, with year-to-date results and comparisons to June 29, 2019. The filing is for Q2 2020, although the request metadata specifies 2019 Q2. Wolverine designs, markets and licenses footwear, apparel and accessories, including Merrell, Saucony, Sperry, Wolverine and other brands. COVID-19 materially affected operations.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 |
|---|---|---|---|---|
| Revenue | $349.1m | $568.6m | $788.4m | $1,092.0m |
| Gross margin | 42.2% | 40.5% | 41.7% | 41.3% |
| Operating profit | $7.5m | $55.5m | $24.4m | $107.9m |
| Net earnings attributable to Wolverine | $(1.6)m | $40.2m | $11.4m | $80.7m |
| Diluted EPS | $(0.02) | $0.45 | $0.14 | $0.88 |
| Operating cash flow | $115.6m | $136.3m | $39.0m | $3.9m |
Q2 revenue fell 38.6%; year-to-date revenue fell 27.8%. Owned eCommerce revenue rose 96.0% in Q2 and 61.8% year to date, partly offsetting weakness in other channels. Gross margin improved, reflecting channel and wholesale product mix, partly offset by higher tariffs on China-sourced inventory. Interest expense rose to $10.5m in Q2 and $18.3m year to date, primarily due to higher average debt.
At June 27, 2020, cash was $422.6m, total debt $1,024.4m, and available revolving credit capacity $669.2m. Current maturities of long-term debt were $183.5m. Year-to-date investing cash flow was positive $9.2m, including $25.6m of proceeds from life-insurance policy liquidations; financing cash flow was positive $195.1m. Inventory was $386.5m, up from $348.2m at December 28, 2019, but down 4.9% year over year.
Changes, outlook and material items
- Both reportable groups declined: Q2 Michigan Group revenue fell 31.7% and Boston Group revenue fell 46.9%. The declines reflected pandemic-related disruption and store closures; all U.S. and Canadian stores had reopened by quarter-end under safety protocols.
- The company raised liquidity through a $171m incremental term loan due May 2021 and issued $300m of 6.375% senior notes due May 2025. It suspended share repurchases in March 2020. Management reported compliance with debt covenants.
- Management said operating cash flow should meet working-capital needs for the foreseeable future and expects excess operating cash flow to be used to reduce debt. It did not provide a quantified earnings or revenue forecast, citing uncertainty about the pandemic.
- COVID-19 risks include renewed store closures, weaker consumer demand, wholesale order cancellations or customer distress, supply-chain disruption, added operating costs and potential asset impairment. The company reported no goodwill or indefinite-lived intangible impairment trigger at quarter-end, but identified Sperry as a potential exposure if results or economic conditions deteriorate.
- Environmental matters remain material. A 2020 settlement with 3M provided $55m; a consent decree requires water-system extension and other remediation, subject to a $69.5m aggregate cap for the specified extension. The environmental reserve was $106.7m, including $34.5m expected within 12 months. Separate individual and consolidated putative class-action claims had no reserve because adverse verdicts were not considered probable and losses could not be reliably assessed.
- Q2 environmental and related costs were a net recovery of $3.9m, including recognized insurance recoveries; the company also recognized $5.8m in second-quarter recoveries under interim legacy-insurance agreements pending final resolution.
Investor verification priorities
- Confirm the intended filing period: this document reports Q2 2020, not Q2 2019.
- Track post-quarter sales, eCommerce trends, reopening conditions and the effect of COVID-19 on wholesale customers and supply chains.
- Review debt maturities and refinancing needs, particularly the $171m term loan due May 2021, covenant headroom and cash use.
- Monitor environmental remediation spending, insurance recoveries, litigation developments and whether the $106.7m reserve remains adequate.
- Assess whether the stronger reported operating cash flow is sustainable, given working-capital movements and the $55m 3M settlement included in cash-flow reconciliation.