Wolverine World Wide, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 12-week third quarter ended September 6, 2014, and the first 36 weeks of fiscal 2014. Although the request metadata says 2013 Q3, the filing itself is for 2014 Q3; comparisons below are with the corresponding 2013 periods. Wolverine designs, markets and sells footwear, apparel and accessories through owned and licensed brands, retail stores and websites.
Financial performance
| Metric | 12 weeks ended Sep. 6, 2014 | Comparable 2013 period | 36 weeks ended Sep. 6, 2014 | Comparable 2013 period |
|---|---|---|---|---|
| Revenue | $711.1 million | $716.6 million | $1,952.2 million | $1,950.3 million |
| Gross profit | $284.7 million | $286.0 million | $786.2 million | $789.1 million |
| Operating profit | $87.6 million | $86.3 million | $200.3 million | $174.3 million |
| Net earnings attributable to Wolverine | $57.8 million | $54.4 million | $122.4 million | $102.1 million |
| Diluted EPS | $0.57 | $0.54 | $1.20 | $1.02 |
| Operating cash flow | Not provided for the quarter | $114.7 million | $125.4 million |
- Third-quarter revenue declined 0.8%, while diluted EPS increased 5.6%. Year-to-date revenue was nearly flat, while diluted EPS rose 17.6%.
- Gross margin was 40.0% for the quarter, up 0.1 percentage point year over year; year-to-date gross margin was 40.3%, down 0.2 point. Quarterly margin benefited from higher selling prices net of higher product costs. Year-to-date results were pressured by promotions and unfavorable foreign-exchange contracts.
- Quarterly operating profit increased 1.5%; year-to-date operating profit increased 14.9%, supported in part by lower acquisition integration costs, pension expense and incentive compensation. Restructuring charges partly offset these reductions.
- Net cash from operations was $114.7 million; capital expenditures were $21.4 million, implying operating cash flow less capital expenditures of $93.3 million. Cash increased $17.3 million from year-end to $231.5 million.
Balance sheet and liquidity
- At September 6, 2014, cash and equivalents were $231.5 million; total debt was $1,096.6 million, including $51.6 million of current maturities. Cash less total debt was approximately $865.1 million net debt.
- Current assets were $1,249.0 million and current liabilities were $362.2 million. Inventory stood at $466.3 million, up from $428.2 million at December 28, 2013.
- The company had $196.7 million of available revolving-credit capacity, net of letters of credit. It reported compliance with credit-agreement covenants.
- Debt decreased from $1,150.0 million at year-end, primarily through Term Loan A principal payments. The $375 million public bonds bear 6.125% interest and mature in 2020; Term Loan A matures in 2018.
Material changes and segment trends
- Lifestyle Group: Revenue fell 6.7% in the quarter and 5.8% year to date; operating profit declined 19.3% and 26.1%, respectively. Weakness in Sperry Top-Sider and Stride Rite, including category and channel pressures, was partly offset by Keds growth.
- Performance Group: Revenue rose 2.2% in the quarter and 4.4% year to date; operating profit increased 7.4% and 14.2%. Merrell, Saucony and Chaco contributed to growth.
- Heritage Group: Revenue increased 4.6% in the quarter and 3.2% year to date, with operating profit up 9.0% and 5.4%. Cat footwear growth was partly offset by declines in other brands.
- Quarterly results included $8.0 million of restructuring costs and $2.3 million of acquisition-related integration costs. Year-to-date restructuring costs were $12.0 million across the reported cost lines; integration costs were $6.4 million, down from $30.5 million in the comparable period.
- The effective tax rate was 25.7% in the quarter and 27.1% year to date, versus 25.9% and 24.2% in the prior-year periods. The company cited the expiration of the federal research and development tax credit and prior-year tax benefits.
Outlook, risks and contingencies
- The company announced a consumer-direct realignment: it intends to close up to 140 stores by the end of 2015, consolidate support functions and make other organizational changes. Estimated pretax charges are $26.6–$32.0 million, including $9.6–$11.6 million of non-cash charges; expected annual pretax benefits after implementation are approximately $11.0 million.
- Management said operating cash flow and potential revolver borrowings should meet working-capital needs for the foreseeable future. Excess cash may be used for debt reduction, growth initiatives, capital spending, dividends or share repurchases. The filing provides no specific revenue or EPS guidance.
- Risks highlighted include changes in consumer demand, economic and credit conditions, currency movements, seasonality and weather, competition, significant-customer relationships, supply-chain and raw-material availability, legal and regulatory matters, cyber risks, and the performance of consumer-direct operations and acquired businesses.
- Foreign cash was approximately $199.0 million and is intended to remain permanently reinvested abroad; repatriation could create additional U.S. tax liability. Environmental and other legal matters were described as not expected to have a material adverse effect, though outcomes are uncertain.
- The company authorized a $200 million share-repurchase program over four years but reported no open-market purchases under it through the quarter. Employee-related share transactions did occur.
Investor verification points
- Confirm the reporting-period mismatch in the request metadata: this filing is for fiscal 2014 Q3, not 2013 Q3.
- Assess whether the planned store closures and realignment deliver the stated annual savings, and track total charges against the estimate.
- Monitor Lifestyle Group sales and profitability, inventory growth, and the effect of promotional activity on gross margin.
- Review debt paydown, interest-rate exposure, covenant compliance, and the availability of cash held overseas.
- Check the subsequent impact of tax-credit expiration, foreign-exchange changes, and any updates to legal or environmental contingencies.