Wolverine World Wide, Inc. - 10-K Summary (Fiscal Year Ended Dec 30, 2006)
Business Context and Reporting Period
This report covers the fiscal year ended December 30, 2006. Wolverine World Wide, Inc. is a leading designer, manufacturer, and marketer of casual, work, and outdoor footwear. The company operates through one reportable segment, Branded Footwear and Licensing, and other business units including retail, a tannery, and pigskin procurement. Key brands include Merrell, Wolverine, Hush Puppies, Cat, Harley-Davidson, Bates, and Sebago. The company sold approximately 46.9 million pairs of footwear in 2006 and distributes products in over 170 countries.
Key Financial Metrics
| Metric | 2006 | 2005 |
|---|---|---|
| Total Revenue | $1,141.9 million | $1,061.0 million |
| Gross Margin | $441.5 million (38.7%) | $405.2 million (38.2%) |
| Net Earnings | $83.6 million | $74.5 million |
| Diluted EPS | $1.47 | $1.27 |
| Cash from Operations | $108.3 million | $117.3 million |
| Cash and Equivalents (Year End) | $124.7 million | $85.3 million |
| Total Debt | $21.5 million | $32.4 million |
| Inventory | $184.3 million | $161.3 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 7.6% to a record $1.142 billion, driven by a 7.5% increase in the Branded Footwear and Licensing segment. The Outdoor Group (Merrell, Sebago, Patagonia) saw a 16.5% revenue increase, while the Wolverine Footwear Group declined 3.4% due to planned reductions in Department of Defense contract shipments.
- Profitability: Net earnings rose 12.3% to $83.6 million. Gross margin improved by 50 basis points to 38.7%, aided by favorable product costs and business mix, partially offset by European anti-dumping duties.
- Balance Sheet: Cash and cash equivalents increased 46.2% to $124.7 million. Total debt decreased 33.8% to $21.5 million due to principal payments on senior notes. Inventory increased 14.2% to support global growth and new product launches.
- Accounting Changes: The company adopted SFAS No. 123(R) for stock-based compensation, resulting in a $7.2 million expense. It also adopted SFAS No. 158 for pension plans, recognizing a net liability adjustment on the balance sheet with no impact on net earnings.
Guidance, Outlook, and Risks
- Outlook: Management projects mid-to-upper single-digit annual revenue growth and double-digit EPS increases. The company expects to launch Merrell apparel and Patagonia footwear in 2007, with significant investment in these initiatives.
- Dividends: A quarterly dividend of $0.09 per share was declared in Q1 2007, a 20% increase over the prior year's Q1.
- Key Risks:
- Anti-Dumping Duties: European Commission duties of 16.5% (China) and 10.0% (Vietnam) on leather footwear are in effect through October 2008, impacting European operations.
- Supply Chain: Heavy reliance on foreign manufacturers (88% of pairs sourced from third parties, predominantly in Asia) exposes the company to currency fluctuations, trade barriers, and labor issues.
- Consumer Demand: Sensitivity to economic conditions, consumer spending patterns, and changes in fashion preferences.
- Licensing: Dependence on key license agreements (Cat, Harley-Davidson, Patagonia) which are subject to termination.
Investor Verification Checklist
- Verify the impact of European anti-dumping duties on gross margins in future quarters.
- Monitor inventory levels and turnover ratios given the 14.2% increase in inventory.
- Assess the success of the 2007 product launches (Merrell Apparel, Patagonia Footwear) against the $6.8 million investment made in 2006.
- Review the execution of the stock repurchase program (1.2 million shares remaining authorized).
- Track the resolution of the Stanley Footgear license, which terminates in June 2008.