Wolverine World Wide, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended September 28, 2019, not 2018 Q3 as stated in the request metadata. Comparisons below are against the quarter ended September 29, 2018; year-to-date figures cover the first three quarters.
Business context and reporting period
Wolverine designs, markets and licenses footwear, apparel and accessories across brands including Merrell, Saucony, Sperry, Wolverine and Keds. It sells through wholesale and consumer-direct channels and reported two segments: Wolverine Michigan Group and Wolverine Boston Group. The company operated 94 retail stores in the U.S. and Canada and 41 consumer-direct websites at quarter-end.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | First three quarters 2019 | First three quarters 2018 |
|---|---|---|---|---|
| Revenue | $574.3 million | $558.6 million | $1,666.3 million | $1,659.6 million |
| Gross margin | 42.4% | 41.6% | 41.6% | 41.8% |
| Operating profit | $68.3 million | $68.4 million | $176.2 million | $198.0 million |
| Net earnings attributable to Wolverine | $48.7 million | $58.8 million | $129.4 million | $160.8 million |
| Diluted EPS | $0.57 | $0.60 | $1.44 | $1.65 |
- Q3 revenue rose 2.8%; Boston Group revenue increased 12.4%, while Michigan Group revenue declined 2.7%. Foreign exchange reduced quarterly revenue by about $4.6 million. Year-to-date revenue rose 0.4% and was reduced by $14.9 million by currency movements.
- Q3 gross margin improved on favorable product mix and the Italy distributor acquisition, partly offset by international wholesale business-model changes and higher closeout sales. Year-to-date margin fell 0.2 percentage points.
- Environmental and other related costs were $9.1 million in Q3 versus $2.1 million, and $19.1 million year to date versus $7.6 million. Higher costs, interest expense and tax expense contributed to lower earnings. The Q3 effective tax rate was 20.3% versus 7.8%; year-to-date it was 17.9% versus 13.7%.
- Year-to-date operating cash flow was $16.0 million, compared with cash use of $34.0 million in 2018. Investing used $53.4 million, including capital expenditures of $28.7 million, acquisition spending of $15.1 million and joint-venture investments of $8.5 million. Financing provided $19.4 million. Cash declined $17.9 million year to date to $125.2 million.
- Working capital absorbed cash, notably inventory growth of $94.8 million and a $46.9 million decline in accounts payable. Management attributed higher inventory partly to tariff-risk mitigation, expected sales growth and new stores.
- Total debt was $934.0 million at September 28, 2019, versus $570.5 million at December 29, 2018. Revolver and short-term borrowings were $493.3 million; available revolving capacity was $303.1 million. The company reported compliance with its credit covenants. Cash included $81.8 million held in foreign jurisdictions.
- The company repurchased $314.2 million of shares year to date, including $106.8 million in Q3, and declared a Q3 dividend of $0.10 per share. The balance sheet also reflects substantial treasury-stock purchases and reduced stockholders’ equity.
Material changes and unusual items
- Segment results diverged: Q3 Boston Group revenue and operating profit increased, while Michigan Group revenue and operating profit declined. For the first three quarters, both segments had lower operating profit than the comparable period.
- Wolverine acquired the Saucony distributor in Italy, Sportlab S.R.L., on April 30, 2019. Purchase consideration was $25.1 million; purchase-price allocation remained preliminary at quarter-end.
- The company adopted the new lease standard in fiscal 2019. At September 28 it reported $163.9 million of lease right-of-use assets and $184.5 million of lease liabilities; adoption did not materially affect results or cash flows.
- The operating segments were realigned in Q1 2019, with prior-period segment disclosures restated.
Outlook, commentary and risks
- The filing provides no specific quantitative earnings or revenue guidance. Management stated that operating cash flow and revolving-credit borrowings were expected to be sufficient for foreseeable working-capital needs; excess cash may fund growth, debt reduction, dividends, repurchases and acquisitions.
- PFAS-related environmental matters remain a significant contingency. The company recorded a $14.8 million remediation reserve, of which $10.5 million was expected to be paid within 12 months. Management said potential costs could change materially as investigations and remediation proceed.
- The company faces regulatory actions, individual lawsuits and a consolidated putative class action concerning PFAS associated with its former tannery and disposal sites. It said adverse verdicts were not then considered probable, so no amounts were reserved for those litigation claims. On October 28, 2019, after quarter-end, the EPA and company entered an Administrative Settlement and Order on Consent addressing removal actions.
- Other risks include consumer demand and competition, inventory management, tariffs and sourcing, foreign exchange, wholesale customer and distributor performance, seasonality, brand and goodwill impairment, cyber incidents, and litigation and environmental remediation. The filing reported no material change to the risk factors in the 2018 Form 10-K.
- The company identified Sperry’s $518.2 million trade name carrying value as potentially subject to noncash impairment if brand results fall below projections.
Important facts for investors to verify
- Confirm the reporting-period mismatch: this is a 2019 Q3 filing, despite the 2018 Q3 request metadata.
- Track inventory levels, tariff-related purchasing and subsequent cash conversion, given the large year-to-date working-capital outflow.
- Assess debt and revolver usage alongside share repurchases, covenant headroom and future cash needs.
- Monitor PFAS investigations, remediation spending, litigation developments and any changes to the $14.8 million reserve; the reserve does not include amounts for the litigation claims.
- Review the final Sportlab purchase-price allocation and the performance of the Michigan and Boston segments, particularly brand-level demand and margins.