Wolverine World Wide, Inc. — Q3 2011 Form 10-Q
Reporting period: Third 12-week accounting period ended September 10, 2011; year-to-date covers 36 weeks. Unaudited results are compared with the periods ended September 11, 2010. Amounts below are in U.S. dollars; financial-statement figures are shown in millions unless noted.
Business context
The company designs, sources, markets and licenses branded footwear, apparel and accessories, including Merrell, Wolverine, Cat, Hush Puppies and other brands. It sells through wholesale, licensing, retail stores and e-commerce; its brands were marketed in approximately 190 countries and territories. The company reports one segment, branded footwear, apparel and licensing, and also has consumer-direct and leather operations.
Financial performance
| Metric | Q3 2011 | Q3 2010 | 36 weeks 2011 | 36 weeks 2010 |
|---|---|---|---|---|
| Revenue | $361.6 | $320.4 | $1,002.6 | $863.5 |
| Gross profit / margin | $146.7 / 40.6% | $128.6 / 40.1% | $406.6 / 40.6% | $349.8 / 40.5% |
| Operating profit | $56.4 | $47.9 | $139.3 | $111.1 |
| Net earnings | $40.4 | $34.1 | $100.3 | $78.8 |
| Diluted earnings per share | $0.82 | $0.70 | $2.01 | $1.59 |
- Q3 revenue rose 12.9% and net earnings rose 18.5%; year-to-date revenue rose 16.1% and net earnings rose 27.3%. Q3 growth reflected higher volume, strategic price increases and $8.3 million of favorable currency translation; year-to-date currency translation added $17.4 million to revenue.
- Q3 gross margin improved 44 basis points, aided by favorable brand mix, price increases and lower freight costs, partly offset by higher product costs. Year-to-date margin was essentially flat. Q3 SG&A was $90.2 million, or 25.0% of revenue, versus 25.2%; year-to-date SG&A was $267.3 million, or 26.7%, versus 27.3% including prior-year restructuring costs.
- Q3 effective tax rate was 28.3%, versus 29.0%; the 36-week rate was 27.6%, versus 29.0%, reflecting a favorable state tax audit settlement and income mix. Q3 dividend declared was $0.12 per share, versus $0.11.
- Q3 revenue by group: Outdoor $145.4 million, up 19.9%; Heritage $128.0 million, up 6.8%; Lifestyle $55.5 million, up 21.7%. Outdoor and Lifestyle were the strongest growth contributors. Other business-unit revenue fell 5.2% in Q3, with leather declines outweighing consumer-direct growth.
Cash flow, balance sheet and liquidity
- At September 10, 2011, cash was $97.9 million, total current assets $681.7 million and current liabilities $214.2 million. Cash was $52.5 million below January 1, 2011, but $2.6 million above September 11, 2010.
- Debt was approximately $60.0 million: $59.5 million drawn on the revolving facility and $0.5 million of current maturities. The company reported compliance with its covenants. Its revolving facility provided up to $150 million initially, potentially increasing to $225 million under specified circumstances.
- For the first 36 weeks, operating activities used $39.1 million of cash, versus $7.7 million provided in the prior-year period. Higher pension contributions and investment in working capital more than offset higher earnings and lower restructuring payments. Pension contributions were $31.8 million, versus $10.4 million.
- Receivables were $278.4 million, up $39.9 million year over year, primarily with higher sales. Inventory was $278.2 million, up $69.7 million or 33.4%, to support new collections and orders, and reflecting higher product costs and currency effects. Capital expenditures were $13.5 million for the 36 weeks.
- The company repurchased approximately 1.57 million shares for $55.8 million in the first 36 weeks, including 948,256 shares for $32.7 million in Q3. Approximately $98.3 million remained under the February 2010 authorization. Stockholders’ equity was $601.0 million at period-end.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or revenue guidance. Management said cash, operating cash flows and revolver access were expected to meet working-capital needs for the foreseeable future; excess cash may be used for capital spending, debt repayment, growth initiatives, dividends or buybacks.
- Management cited consumer demand and preferences, economic and credit conditions, customer relationships and order cancellations, product and labor costs, supply-chain and port interruptions, currency movements, interest rates, pension funding, regulation and litigation, and execution of growth initiatives as risks that could affect results.
- Q3 included no restructuring or transition costs. The prior-year 36-week period included $4.2 million of such costs ($0.06 per diluted share); the restructuring plan was substantially completed in 2010, with $0.5 million remaining in the reserve at September 10, 2011.
- Environmental remediation claims and routine legal matters remained unresolved; management did not expect them to have a material adverse effect, though some environmental liabilities were not yet fixed. The company also had future minimum royalty and advertising commitments under licenses.
- Foreign-exchange forward contracts had a $69.4 million notional value and maturities up to 308 days. The company reported no material change in its primary market-risk exposures and did not use derivatives for speculative trading.
Important facts for investors to verify
- Whether elevated inventory converts to sales without increased discounting or obsolescence, and whether receivables are collected on schedule.
- Whether operating cash flow recovers after the large pension contribution and working-capital outflows, and whether revolver borrowings decline.
- Whether product-cost inflation, freight, currency and consumer demand affect future gross margins and growth across the Outdoor, Heritage and Lifestyle groups.
- Remaining repurchase authorization, dividend sustainability, pension funding needs, and developments in environmental or other legal matters.