Business context and reporting period
Wolverine World Wide, Inc. designs, markets and licenses footwear, apparel and accessories, including Merrell, Sperry, Saucony, Wolverine, Hush Puppies and other brands. It sells in about 200 countries and territories through wholesale, licensing, distribution and consumer-direct channels.
Period clarification: Although the request metadata says “2016 Q4,” this filing is the company’s Form 10-K for the 52-week fiscal year ended December 30, 2017. Fiscal 2016 is the principal comparable year.
Financial performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $2,350.0 million | $2,494.6 million |
| Gross profit / margin | $914.4 million / 38.9% | $959.9 million / 38.5% |
| Operating profit | $23.9 million | $159.9 million |
| Net earnings attributable to Wolverine | $0.3 million | $87.7 million |
| Diluted earnings per share | $0.00, as reported rounded | $0.89 |
| Cash from operating activities | $202.7 million | $296.3 million |
| Cash and cash equivalents at year-end | $481.0 million | $369.8 million |
| Debt, including capital leases | $782.6 million | $820.7 million |
Operating profit fell to $23.9 million, about a 1.0% operating margin. The company reported a $10.6 million pretax loss and a $9.9 million income tax benefit; net loss before noncontrolling interests was $0.7 million. Gross margin improved 40 basis points. Inventory declined 20.6% year over year to $276.7 million. Capital expenditures were $32.4 million, and cash dividends declared were $0.24 per share.
At year-end, current assets were $1,074.3 million and current liabilities were $362.3 million. The company had $597.5 million available under its revolving credit facility and reported compliance with its credit agreement covenants.
Material changes versus the prior comparable period
- Revenue decreased 5.8%. Management attributed the reduction primarily to retail-store closures and the transition of Stride Rite to a global licensing model, together accounting for $159.3 million of the year-over-year decline.
- Operating expenses increased to $890.5 million, including $72.9 million of restructuring and related costs, $68.6 million of intangible impairment, and $35.3 million of environmental and other related costs.
- Cash from operations declined $93.6 million, mainly because of restructuring payments, a voluntary pension contribution and working-capital changes. Lower inventory was a source of cash.
- Segment revenue was mixed: Outdoor & Lifestyle rose 6.3% to $947.1 million; Boston declined 6.3% to $833.8 million; Heritage declined 5.5% to $327.9 million; and Multi-Brand declined 45.2% to $166.9 million, reflecting store closures and the Stride Rite model change.
- Corporate expenses increased substantially, leaving total operating profit at $23.9 million despite improved operating profit in each reportable segment.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific revenue or earnings guidance. Management said cash from operations and, if needed, the revolving facility should meet foreseeable working-capital needs. It expected comparable quarterly dividends in fiscal 2018 after declaring $0.08 per share in February 2018.
- Restructuring: The completed 2017 plan is expected to yield about $11 million in annual pretax benefits; the consumer-direct realignment is expected to yield about $20 million annually. These are estimates, not guaranteed results.
- Impairment: The company recorded a $68.6 million noncash impairment of the Sperry trade name in Q4. Sperry’s remaining carrying value was $518.2 million; further operating deterioration could prompt additional impairment.
- Tax reform: The Tax Cuts and Jobs Act generated a provisional net tax expense of $8.6 million, including a $58.1 million transition-tax liability payable over eight years, offset partly by a $52.5 million noncash deferred-tax remeasurement benefit. The company said its estimates remained subject to finalization.
- Environmental matters: A $31.1 million remediation reserve was recorded, including $12.5 million expected to be paid in 2018. Michigan and EPA actions concern alleged PFAS releases associated with the former tannery and disposal sites. Individual and putative class lawsuits were also filed; the company said it could not conclude adverse verdicts were probable and recorded no reserve for those claims. Remediation costs may exceed current estimates.
- Other risks: Key exposures include changing consumer preferences and competition, inventory and retail-channel execution, reliance on Asian third-party sourcing, foreign exchange and trade restrictions, customer and distributor credit, data security, and debt covenants. The filing also identifies seasonality and weather as sources of volatility.
- Backlog: Orders were approximately $913 million at February 18, 2018, versus $979 million a year earlier; the earlier amount included $52 million tied to divested businesses. Most orders were expected to ship in fiscal 2018, but orders may be cancelled and backlog is not necessarily predictive of shipments.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether underlying operating performance improves after separating recurring results from restructuring, impairment, environmental and tax-reform items.
- Whether the $68.6 million Sperry impairment signals further brand deterioration, given the remaining $518.2 million trade-name value.
- Whether the $31.1 million environmental reserve adequately reflects PFAS remediation exposure, and how the regulatory actions and lawsuits develop.
- Whether the expected restructuring savings are achieved and whether the decline in revenue and consumer-direct activity stabilizes.
- Debt repayment, covenant headroom, and cash-flow capacity to fund dividends, repurchases and investment; also verify final tax-reform accounting and payments.