Wolverine World Wide, Inc. — Form 10-Q Summary
Period and context: The filing covers the quarter and six months ended July 2, 2022, compared with the periods ended July 3, 2021. Although the request metadata says 2021 Q2, the filing itself is for 2022 Q2. Wolverine designs, markets and licenses footwear, apparel and accessories, including through wholesale and direct-to-consumer channels. Its portfolio includes Merrell, Saucony, Wolverine and Sweaty Betty.
Financial performance and position
- Quarter revenue: $713.6 million, up 12.9%. Gross profit was $307.1 million and gross margin was 43.0%, versus 42.8% a year earlier.
- Quarter earnings: Operating profit was $167.9 million and net earnings attributable to Wolverine were $124.6 million, or $1.53 diluted EPS. Results included a $90.0 million gain from selling Champion footwear trademarks; excluding that gain, operating profit was approximately $77.9 million.
- Six-month results: Revenue was $1,328.4 million, up 16.3%; gross margin was 42.8%, versus 43.1%. Operating profit was $187.5 million, including the $90.0 million trademark-sale gain; net earnings attributable to Wolverine were $134.3 million, or $1.63 diluted EPS.
- Cash flow: Operating activities used $247.9 million in the first six months, compared with $51.7 million generated a year earlier. Investing activities provided $78.7 million, including the $90.0 million trademark-sale proceeds; financing activities provided $163.1 million.
- Liquidity and debt: At July 2, cash was $149.3 million, total debt was $1,227.4 million, and available revolving-facility capacity was $504.2 million. Debt increased from $966.8 million at January 1, 2022. The company reported compliance with credit-facility covenants.
- Working capital: Inventory was $639.5 million, up $307.8 million, or 92.8%, from July 2021; the filing attributes $42.9 million of the increase to Sweaty Betty. Receivables were $420.0 million. The company cited inventory and receivable growth as major operating-cash uses.
- Other metrics: The effective tax rate was 20.8% for the quarter and 21.5% year to date, higher than the prior-year rates due to unfavorable discrete tax items. The company declared a $0.10-per-share quarterly dividend and repurchased $81.3 million of shares year to date.
Material changes versus prior periods
- Quarter revenue growth reflected a $47.4 million Sweaty Betty contribution and growth in the Michigan Group, partly offset by a decline in the Boston Group. Foreign exchange reduced quarterly revenue by $19.4 million.
- Direct-to-consumer revenue rose 21.1% in the quarter, including the Sweaty Betty contribution. Quarter gross margin improved slightly, while the six-month margin declined 30 basis points, pressured by international-channel mix and direct-to-consumer freight and volume costs.
- Reported operating profit rose sharply, but the comparison includes the one-time $90.0 million trademark gain. Year-to-date environmental and related costs were $30.4 million, versus a net recovery of $5.4 million in the prior-year period.
- The cash-flow reversal chiefly reflected working-capital investment, including inventory growth, and environmental-related payments. The company also made substantial share repurchases and funded operations partly through revolving borrowings.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management said operating cash flow is expected to meet working-capital needs and that excess cash may support growth initiatives, debt reduction, dividends and general corporate purposes.
- Management expected supply-chain disruption, freight and labor costs, and inflationary pressures to continue; selective price increases were implemented to partly offset cost pressures. A stronger U.S. dollar was also affecting results. COVID-19-related disruptions and factory closures remained potential risks.
- The company temporarily suspended business operations in Russia in March 2022; Russia represented less than 1% of revenue, and the company reported no assets or employees in Russia or Ukraine.
- Environmental matters: The company had a $65.1 million remediation reserve, including $15.1 million expected to be paid within 12 months. A separate $37.8 million liability was recorded for certain PFAS-related litigation matters after a year-to-date accrual increase of $37.8 million and related payments of $50.1 million. A putative class action and one other lawsuit remained unresolved; the company said it could not estimate potential costs beyond established reserves for ongoing remediation.
- Management reported no triggering events indicating impairment of goodwill or indefinite-lived intangibles at July 2, 2022, but noted that future impairment risk depends on operating assumptions and macroeconomic conditions. The company also identified currency and variable-rate debt exposures.
Important facts for investors to verify
- How much of reported profit growth reflects recurring business performance versus the $90.0 million trademark-sale gain and environmental-cost timing.
- Whether inventory growth converts into sales and cash, particularly amid shipping delays, inflation, and changing consumer demand.
- The trajectory of debt, revolver usage, interest costs and operating cash flow after the working-capital outflow.
- Updates to PFAS remediation and litigation exposure, insurance recoveries, and the adequacy of recorded reserves.
- Performance and profitability of Sweaty Betty and the Boston Group, along with foreign-exchange impacts and margin trends.