Wolverine World Wide, Inc. — Form 10-Q Summary
Period: The filing covers the quarter ended June 29, 2019, and the six months then ended. The request metadata says 2018 Q2; that does not match the filing period.
Business context
Wolverine designs, markets and licenses footwear, apparel and accessories through wholesale, consumer-direct, licensing and distribution channels. Its reportable segments are Wolverine Michigan Group and Wolverine Boston Group. The company reported 89 retail stores in the U.S. and Canada and 41 consumer-direct websites.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $568.6 million | $566.9 million | $1,092.0 million | $1,101.0 million |
| Gross margin | 40.5% | 41.3% | 41.3% | 42.0% |
| Operating profit | $55.5 million | $68.1 million | $107.9 million | $129.6 million |
| Net earnings attributable to Wolverine | $40.2 million | $55.3 million | $80.7 million | $102.0 million |
| Diluted EPS | $0.45 | $0.57 | $0.88 | $1.05 |
| Net cash from operating activities | Not separately stated | Not separately stated | $3.9 million | $65.1 million |
Second-quarter revenue increased 0.3%; first-half revenue declined 0.8%. Lower margins and higher operating expenses contributed to lower operating profit and earnings. Q2 environmental and related costs were $6.2 million versus $2.8 million; first-half costs were $10.0 million versus $5.5 million. Net interest expense was $6.7 million in Q2 and $13.6 million year to date.
Liquidity, debt and capital allocation
- At June 29, 2019, cash was $116.5 million, total debt was $811.0 million, and available revolving credit capacity was $428.1 million. Debt was $570.5 million at December 29, 2018.
- First-half operating cash flow was $3.9 million, investing cash outflow was $42.4 million, and financing cash inflow was $11.0 million. Cash declined $26.6 million from year-end.
- Inventory rose to $406.5 million from $317.6 million at year-end. Management cited tariff mitigation, anticipated sales growth, the Italian distributor acquisition and new stores as factors behind the increase.
- The company repurchased $207.4 million of shares in the first half, including $104.3 million in Q2, and had $220.2 million remaining under its $400 million repurchase authorization. Q2 dividend declared was $0.10 per share, versus $0.08 a year earlier.
- Management said operating cash flow and revolving-credit borrowings should meet working-capital needs for the foreseeable future. The company reported compliance with credit-agreement covenants.
Changes and management commentary
- Michigan Group revenue rose 1.3% in Q2 and 1.8% year to date; Boston Group revenue fell 0.2% and 3.2%, respectively. Cat and Merrell supported Michigan; Chaco was weaker amid a late spring and elevated retailer inventories. Boston weakness reflected lower Saucony demand and declines in Sperry boat shoes.
- Management attributed lower gross margin mainly to product mix and business-model changes, partly offset by a higher consumer-direct mix and fewer markdowns. Boston also faced greater promotional activity and a higher close-out provision.
- On April 30, 2019, the company acquired the Saucony distributor in Italy for total consideration of $25.1 million, including $15.1 million cash, $4.6 million of extinguished payables and $5.4 million contingent consideration. The contingent amount could reach $5.7 million.
- The company adopted lease accounting in 2019, recognizing lease right-of-use assets and liabilities; management said adoption had no material impact on results or cash flows. The balance sheet included $157.8 million of lease right-of-use assets and $176.8 million of recognized operating lease liabilities.
Outlook, risks and contingencies
The filing provides no specific numeric earnings or revenue guidance. Management’s liquidity outlook anticipates adequate working capital from operating cash flow and credit-facility borrowings. The company identifies risks including consumer demand and competition, inventory management, tariffs, foreign exchange, sourcing and supply-chain disruption, wholesale-customer relationships, seasonality, consumer-direct investment, cybersecurity, litigation and impairment of goodwill or intangibles.
Environmental exposure remains a significant uncertainty. The company is responding to Michigan and EPA actions and lawsuits related to alleged PFAS releases from its former tannery and disposal sites. It is conducting testing and remediation, and recorded a $17.3 million remediation reserve ($7.9 million expected within 12 months). No amounts were reserved for individual and class-action claims because the company said adverse verdicts were not then considered probable; potential costs beyond the recorded reserve could not be estimated. The company also warned that Sperry’s $518.2 million trade-name carrying value could be impaired if results fall below projections.
Important facts for investors to verify
- Confirm the intended reporting period: this filing is for Q2 2019, not Q2 2018.
- Track inventory levels, tariff-related purchasing and subsequent sales or markdowns.
- Assess whether operating cash flow improves and whether elevated borrowings and share repurchases remain sustainable.
- Monitor PFAS remediation, litigation, regulatory requirements and any changes to the $17.3 million reserve.
- Review segment trends, especially Saucony and Sperry performance, and the assumptions supporting the Sperry trade-name valuation.