Wolverine World Wide, Inc. — Form 10-Q Summary
Period: Fiscal third quarter ended October 2, 2021, with year-to-date results for the first three quarters of fiscal 2021. The request metadata says “2020 Q3,” but the supplied filing is for 2021 Q3; the comparable prior-year quarter ended September 26, 2020. Dollar amounts are in millions unless noted.
Business context and reporting period
Wolverine designs, markets and licenses footwear, apparel and accessories through wholesale and consumer-direct channels. Its portfolio includes Merrell, Saucony, Sperry, Wolverine and, following its August 2, 2021 acquisition, Sweaty Betty. The company reported in two principal groups, Wolverine Michigan and Wolverine Boston, plus Other and Corporate.
Financial performance
| Metric | Q3 2021 | Q3 2020 | First three quarters 2021 | First three quarters 2020 |
|---|---|---|---|---|
| Revenue | $636.7 | $493.1 | $1,779.3 | $1,281.5 |
| Gross profit | $274.8 | $202.0 | $767.5 | $531.0 |
| Gross margin | 43.2% | 41.0% | 43.1% | 41.4% |
| Operating profit | $42.5 | $42.6 | $164.4 | $67.0 |
| Net earnings (loss) | $(0.8) | $21.7 | $82.0 | $32.6 |
| Net earnings attributable to Wolverine | $0.0 | $22.4 | $83.2 | $33.8 |
| Diluted EPS | $0.00 | $0.27 | $0.98 | $0.41 |
- Q3 revenue increased 29.1%; year-to-date revenue increased 38.8%. Growth reflected recovery from prior-year pandemic disruption, brand performance and the Sweaty Betty acquisition. Sweaty Betty contributed $39.1 of revenue from acquisition through quarter-end.
- Q3 gross margin improved 220 basis points. Management attributed the increase primarily to Sweaty Betty, fewer closeout sales and favorable direct-to-consumer mix and pricing; incremental air freight costs reduced margin by 140 basis points.
- Q3 operating profit was essentially unchanged despite higher revenue, as increased selling, general and administrative expenses and environmental costs offset growth. The quarter included $34.0 of debt extinguishment and other costs, contributing to the consolidated net loss.
- Year-to-date net earnings increased, while operating profit rose to $164.4. Year-to-date diluted EPS was $0.98. Dividends declared were $0.10 per share in Q3 and $0.30 year to date.
Cash flow, debt and liquidity
- Year-to-date operating cash flow was $17.0, down from $135.5 in the prior-year period. Working capital was a significant use of cash, including inventory growth of $124.6 and accounts receivable growth of $90.3, partly offset by a $68.4 increase in accounts payable. The MD&A reports Q3 operating cash use of $34.7.
- Year-to-date investing cash outflow was $429.7, mainly the $417.8 Sweaty Betty acquisition payment; financing cash inflow was $249.7. Cash declined $163.8 from the fiscal-year start to $183.6.
- Total debt was $1,024.4 at October 2, 2021, versus $722.5 at January 2, 2021. The company had $310.0 drawn under revolving credit agreements and $484.1 of available revolver capacity. It reported compliance with credit-facility covenants.
- The company issued $550.0 of 4.000% senior notes due 2029 to redeem $550.0 of older notes. The refinancing generated $34.0 of extinguishment costs, including $28.4 of redemption premiums and $5.6 of financing-fee write-offs.
- After quarter-end, the company amended its senior credit facilities, extending maturity to October 2026 and increasing revolving commitments to $1.0 billion.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided in the supplied filing. Management expected operating cash flow to meet working-capital needs for the foreseeable future.
- COVID-related factory closures and reduced production capacity, particularly in Vietnam, and global freight, container and port disruptions delayed inventory and wholesale shipments. Management expected supply-chain disruption to continue and potentially adversely affect fiscal 2021 revenue growth and profitability. Q3 and year-to-date incremental air freight costs were $7.0 and $22.0, respectively.
- The Sweaty Betty acquisition cost $417.8 net of acquired cash. Its preliminary purchase-price allocation includes $346.4 of indefinite-lived trademark value and $117.4 of goodwill; the allocation remains subject to finalization. The company recorded $6.9 of acquisition transaction costs.
- Environmental remediation reserves totaled $80.7, including $28.5 expected to be paid within 12 months; the remaining $52.2 is expected to be paid over as long as 25 years. A separate $10.6 accrual was recorded for certain PFAS-related litigation matters. The company said a loss exceeding that accrual is reasonably possible but could not estimate the excess range. A proposed individual-litigation settlement was non-binding at filing.
- Other disclosed risks include uncertainty around COVID-19, consumer demand, inventory management, foreign exchange, supply-chain costs, competition and possible impairment of the Sperry trademark. Management reported no impairment trigger as of October 2, 2021.
Important facts for investors to verify
- Confirm the reporting-period discrepancy in the request metadata: the filing covers Q3 2021, not Q3 2020.
- Reconcile the MD&A statement that Q3 2021 diluted loss per share was $0.27 with the financial statements, which report Q3 2021 diluted EPS of $0.00 and Q3 2020 diluted EPS of positive $0.27.
- Track cash conversion, inventory and receivables, and the company’s ability to deliver orders amid continuing production and freight disruptions.
- Assess post-acquisition Sweaty Betty performance, integration, and the assumptions underlying its preliminary intangible-asset and goodwill valuations.
- Monitor PFAS remediation spending and litigation outcomes, including whether the proposed settlement proceeds and whether losses exceed recorded accruals.