Business context and reporting period
Wolverine World Wide, Inc. designs, markets and licenses footwear, apparel and accessories, including Merrell, Saucony, Sperry, Wolverine and other brands. This Form 10-Q covers the 13-week quarter ended March 30, 2019, compared with the quarter ended March 31, 2018. The request metadata says “2018 Q1,” but the filing is for 2019 Q1.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $523.4 million | $534.1 million |
| Gross profit / margin | $220.2 million / 42.1% | $227.9 million / 42.7% |
| Operating profit | $52.4 million | $61.5 million |
| Net earnings attributable to Wolverine | $40.5 million | $46.7 million |
| Diluted EPS | $0.43 | $0.48 |
| Operating cash flow | $(132.4) million | $(61.3) million |
| Capital expenditures | $7.8 million | $3.4 million |
| Cash and cash equivalents | $80.6 million | $257.1 million at March 31, 2018 |
| Total debt | $771.3 million | $672.3 million at March 31, 2018 |
Operating margin was approximately 10.0%, versus 11.5% in the prior-year quarter. Net margin attributable to Wolverine was approximately 7.7%, versus 8.7%. The effective tax rate fell to 13.2% from 15.1%, reflecting the positive net impact of discrete items. The company declared dividends of $0.10 per share, compared with $0.08.
Material changes and management commentary
- Revenue declined 2.0%; foreign exchange reduced revenue by $5.8 million. Wolverine Boston Group revenue fell 6.5%, driven by weaker wholesale demand for Saucony and lower Sperry boat-shoe demand. Wolverine Michigan Group revenue increased 2.3%, supported by strength in work footwear.
- Gross margin declined 0.6 percentage points. Management cited product mix, business-model changes for certain international wholesale customers, and customer bankruptcies affecting royalties.
- Operating profit fell 14.8% and attributable net earnings fell 13.3%. Higher distribution, product-development and environmental costs partly offset lower general and administrative costs.
- Inventory was $374.0 million, up 28.7% from March 2018. Management attributed the increase to lower-than-anticipated revenue for certain brands and purchases intended to support growth later in 2019.
- Operating cash use increased, with working capital a $180.8 million use of cash, reflecting lower accounts payable, higher inventory and accounts receivable, and lower other operating liabilities. The company said seasonality and payment timing contributed.
- Debt increased from $570.5 million at December 29, 2018, largely to fund share repurchases and working-capital needs. The company repurchased $103.1 million of stock during the quarter at an average $35.65 per share.
Liquidity, debt, outlook and risks
At quarter-end, the company had $80.6 million of cash, $771.3 million of debt and $471.7 million of available revolving-credit capacity. It reported compliance with credit-agreement covenants. Management expects operating cash flow and revolver borrowings to meet working-capital needs for the foreseeable future; excess cash may support growth, debt reduction, dividends, repurchases and acquisitions. The filing provides no formal revenue or earnings guidance.
Environmental matters remain a significant uncertainty. The company is addressing PFAS contamination associated with its former tannery and disposal sites under EPA and Michigan actions, and is defending individual and putative class-action lawsuits. It had a $20.3 million remediation reserve ($9.2 million expected within 12 months), but no reserve for the litigation claims because management could not conclude adverse verdicts were probable. The company says remediation estimates could change materially; potential losses beyond the recorded reserve are not estimable for certain ongoing sites.
Other notable items include adoption of the new lease standard, which added $157.2 million of lease right-of-use assets and $175.9 million of recognized lease liabilities at quarter-end without a material impact on results or cash flows. On April 30, 2019, the company acquired Italian Saucony distributor Sportlab S.R.L. for $11.7 million plus additional receivables and an earnout; initial accounting impacts were not yet available. Risks discussed include consumer demand and competition, inventory management, tariffs and foreign exchange, sourcing and supply disruptions, customer concentration or loss, cyber incidents, brand and impairment risks, and environmental and legal contingencies.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the filing covers Q1 2019, not Q1 2018.
- Track inventory levels, sell-through and working-capital cash use, particularly given the inventory increase and negative operating cash flow.
- Assess debt, revolver utilization, interest-rate exposure and covenant headroom alongside continued buybacks and dividends.
- Monitor Boston Group demand, Michigan Group margins, customer bankruptcies and wholesale business-model changes.
- Follow PFAS remediation developments, litigation exposure, insurance recovery efforts and possible changes to the environmental reserve.
- Review the Sportlab acquisition’s final purchase accounting and earnout terms when disclosed.