Wolverine World Wide, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2018, compared with the quarter ended April 1, 2017. The request metadata says “2017 Q1,” but the filing itself reports first-quarter 2018.
Business context and results
The company designs, markets and licenses footwear, apparel and accessories through wholesale, consumer-direct and licensing channels. Its reportable groups are Outdoor & Lifestyle, Boston and Heritage.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $534.1 million | $591.3 million |
| Gross profit / margin | $227.9 million / 42.7% | $234.7 million / 39.7% |
| Operating profit | $61.5 million | $34.5 million |
| Net earnings attributable to Wolverine | $46.7 million | $16.7 million |
| Diluted earnings per share | $0.48 | $0.17 |
| Net cash used in operating activities | $61.3 million | $30.8 million |
Changes and management commentary
- Revenue fell 9.7%. The company cited lower sales from retail-store closures ($33.8 million), the Stride Rite transition from wholesale to licensing ($19.4 million), Sebago’s divestiture ($7.0 million) and exit from Bates’ Department of Defense business ($6.3 million). Foreign exchange increased revenue by about $8.1 million.
- Boston Group revenue declined 17.0%; Outdoor & Lifestyle fell 3.7%; Heritage fell 3.4%. Despite lower revenue, operating profit increased in all three groups.
- Gross margin rose 300 basis points, reflecting improved product mix, lower product costs and lower restructuring costs. Operating profit benefited from the absence of prior-year restructuring and related costs; Q1 2018 included $2.7 million of environmental and related costs.
- The effective tax rate decreased to 15.1% from 20.7%, reflecting the lower U.S. corporate tax rate under the Tax Cuts and Jobs Act and favorable discrete items.
- Inventory was $290.5 million, down $66.0 million, or 18.5%, from the prior-year quarter.
Cash, debt and liquidity
- Cash and cash equivalents were $257.1 million at March 31, 2018, versus $304.1 million a year earlier. Operating cash use reflected seasonal working-capital needs, including lower accounts payable and higher receivables and inventory.
- Total debt was $672.3 million, down from $813.1 million a year earlier. The company made a voluntary $100 million Term Loan A principal payment and scheduled debt payments during the quarter.
- Available revolving-credit capacity was $597.5 million; the company reported compliance with its credit-agreement covenants. Management said operating cash flow and available borrowing capacity should meet working-capital needs for the foreseeable future.
- Financing cash use was $159.1 million, including $111.3 million of long-term debt payments, $42.5 million of treasury-stock purchases and $5.8 million of dividends paid. The company repurchased 1.51 million shares at an average $29.56 per share and declared a $0.08-per-share dividend.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management expects excess operating cash, if available, to support growth, debt reduction, dividends, repurchases and acquisitions.
- Environmental matters are significant. The company faces Michigan and EPA actions concerning PFAS associated with its former tannery and disposal sites, as well as individual and putative class-action lawsuits. It is conducting sampling and remediation work. The recorded remediation reserve was $29.2 million, including $12.7 million expected to be paid within 12 months. The company said it cannot estimate potential losses beyond recorded reserves for ongoing remediation or quantify possible exposure from the lawsuits; no reserve was recorded for those claims.
- The company noted that additional environmental costs could materially change current estimates. Other stated risks include consumer demand and preferences, competition, inventory management, foreign exchange, sourcing and supply disruptions, customer relationships, seasonality, and impairment risk.
- The 2017 impairment of the Sperry trade name was $68.6 million; its carrying value remained $518.2 million at quarter-end. The company warned that weaker future Sperry results could lead to another non-cash impairment charge.
- Fiscal 2018 restructuring plans were completed in 2017, with expected annual pretax benefits of approximately $11 million for the 2017 plan and $20 million for the 2016 store-closure plan.
Key facts for investors to verify
- Whether revenue trends and segment operating-profit gains persist after store closures and brand/business-model changes.
- Whether the improved gross margin and earnings are sustainable, given the contribution from lower restructuring costs and tax-rate changes.
- How seasonal working-capital outflows affect cash generation and the company’s ability to balance debt reduction, repurchases and dividends.
- Whether PFAS investigations, remediation requirements or litigation lead to costs beyond the $29.2 million reserve.
- Whether the Sperry brand’s performance supports its substantial recorded intangible-asset value and avoids further impairment.