Wolverine World Wide, Inc. — Form 10-Q Summary
Period: The filing covers the 12 weeks ended March 24, 2012, compared with the 12 weeks ended March 26, 2011. This is fiscal 2012 Q1, notwithstanding the request metadata identifying 2011 Q1. Amounts below are in millions of dollars except per-share data.
Business context
Wolverine designs, sources, markets, licenses and distributes footwear, apparel and accessories through brands including Merrell, Wolverine, Hush Puppies, Saucony-related brands were not yet part of the company, and others. It also operates consumer-direct retail and leather businesses. Its 12-brand portfolio reached more than 190 countries and territories; at quarter-end it operated 101 stores and 41 consumer-direct websites.
Financial results
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $322.8 | $330.9 | Down 2.4% |
| Gross profit / margin | $132.2 / 41.0% | $137.8 / 41.6% | Margin down 0.6 percentage points |
| SG&A | $95.2 | $88.3 | Up 7.8%; 29.5% vs. 26.7% of revenue |
| Operating profit | $37.0 | $49.5 | Down 25.3% |
| Net earnings | $31.2 | $35.9 | Down 13.1% |
| Diluted EPS | $0.64 | $0.72 | Down 11.1% |
| Operating cash flow | $(64.3) | $(82.8) | Cash use improved $18.5 |
Revenue declined mainly from weakness in Europe and comparison with a strong prior-year quarter; foreign exchange reduced reported revenue by $2.2. Branded footwear, apparel and licensing revenue fell 3.1%, while other business units rose 4.5%. The Heritage Group declined 7.3%, Outdoor declined 0.7%, and Lifestyle declined 2.7%.
Gross margin pressure from higher product costs and product mix was partly offset by selling-price increases and favorable currency effects. SG&A rose due primarily to higher pension expense, brand investments, employee separation costs, additional-store costs and bad debt expense. Pension expense was $6.5 versus $4.0 million a year earlier.
Cash, debt and liquidity
- At March 24, cash was $123.3, revolving-credit borrowings were $70.0, and interest-bearing debt totaled $70.0. Revolver borrowings were $11.0 at year-end 2011 and $30.0 a year earlier.
- Current assets were $690.5 and current liabilities $199.1. Inventory was $265.1, up 6.0% year over year and 12.9% from year-end, attributed to new products and higher product costs.
- Operating cash use reflected working-capital investment and a $26.7 pension contribution. Investing cash use was $3.3, including $2.8 of capital expenditures; financing provided $51.7, principally from net revolver borrowings.
- The revolving facility had an initial limit of $150.0, expandable to $225.0 under certain conditions. The company reported compliance with debt covenants and expected cash and available financing to meet foreseeable working-capital needs.
- The company declared a $0.12-per-share dividend, repurchased 64,612 shares for about $2.4, and had $86.4 remaining under its repurchase authorization at quarter-end.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided in the filing. Management cited continued European weakness, higher input costs and seasonal working-capital needs.
- The 12.4% effective tax rate, versus 28.0% a year earlier, reflected a favorable ruling related to long-term global tax planning. The filing does not quantify the ruling’s full or recurring effect. Repatriation of certain foreign earnings could create material additional U.S. tax.
- In the second quarter, the company announced an agreement to acquire Collective Brands’ Performance + Lifestyle Group, including Sperry Top-Sider, Stride Rite, Saucony and Keds. It anticipated closing in fiscal 2012; purchase price, financing and final closing details are not stated in this filing.
- Risks include economic and consumer-demand changes, foreign-exchange movements, input and labor availability, customer/order changes, military contract timing, competition, pension costs and legal or regulatory matters. Environmental claims and other routine litigation were reported; management did not expect a material adverse effect. Tax audits were ongoing, with no significant payment expected.
- Foreign-currency forward contracts had a $102.1 notional value and maturities up to 336 days. The company reported no material hedge ineffectiveness. Minimum royalty and advertising commitments extend through 2016 and thereafter.
Important facts for investors to verify
- Whether revenue trends and weakness in Europe improved, and how much of the decline reflected currency versus underlying demand.
- Whether higher product costs, closeout sales and elevated SG&A continued to pressure margins.
- The sustainability of the unusually low tax rate and any consequences of foreign-earnings repatriation.
- Inventory, receivables and operating cash flow trends, along with pension funding requirements and revolver usage.
- Acquisition terms, financing, integration plans and realized performance of the Performance + Lifestyle Group.