Wolverine World Wide, Inc. — Q1 FY2016 Form 10-Q
Reporting period: First 12-week accounting period ended March 26, 2016; comparisons are with the 12 weeks ended March 28, 2015. The filing is for Q1 FY2016, notwithstanding the request metadata identifying 2015 Q1.
Business context and results
Wolverine designs, sources, markets and distributes branded footwear, apparel and accessories, with consumer-direct and leather businesses. Its brand portfolio includes Merrell, Sperry, Saucony, Wolverine and others; products are marketed in approximately 200 countries and territories.
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $577.6 million | $631.4 million | Down 8.5% |
| Gross profit / margin | $228.8 million / 39.6% | $261.4 million / 41.4% | Margin down 180 bps |
| Operating profit / margin | $34.0 million / 5.9% | $63.6 million / 10.1% | Profit down 46.5%; margin down 420 bps |
| Net earnings attributable to Wolverine | $17.4 million | $40.1 million | Down 56.6% |
| Diluted EPS | $0.18 | $0.39 | Down 53.8% |
| Net cash used in operating activities | $78.9 million | $43.0 million | Cash use increased |
| Capital expenditures | $9.9 million | $6.4 million | Increased |
Gross margin was pressured by unfavorable foreign currency (130 bps), higher restructuring costs (70 bps) and unfavorable product mix (100 bps), partly offset by price increases and product cost reductions. The effective tax rate rose to 31.4% from 27.3%, primarily because income shifted among jurisdictions with differing tax rates. Net interest expense fell to $8.5 million from $9.5 million.
Segments and material changes
- Revenue declined in each reportable group: Outdoor & Lifestyle $217.7 million (down 5.8%); Boston $209.1 million (down 10.8%); Heritage $71.8 million (down 11.8%); and Multi-Brand $68.4 million (down 4.9%).
- Segment operating profit was $48.8 million for Outdoor & Lifestyle, $27.7 million for Boston, and $8.5 million for Heritage. Multi-Brand recorded a $1.4 million operating loss. Corporate operating costs increased to $50.1 million from $39.7 million, largely due to restructuring and impairment expenses.
- Management attributed the revenue decline to lower demand, unfavorable currency, store closures and the Cushe business exit. Customer inventory levels and shipping delays affected several brands; Chaco was a notable growth exception.
- Reported revenue was reduced by approximately $6.3 million from currency movements, $3.9 million from retail store closures and $2.4 million from the Cushe exit.
Cash, debt and liquidity
Cash and cash equivalents were $158.2 million at March 26, 2016, down from $194.1 million at fiscal year-end; $139.5 million was held in foreign jurisdictions and management intends to reinvest those funds indefinitely outside the U.S. The company reported $870.3 million of total debt, including $60.0 million drawn on its revolving facility, and $436.2 million of available revolving capacity, net of letters of credit. Debt increased from $809.8 million at year-end, which management attributed to seasonal revolver borrowings. The company was in compliance with its credit agreement covenants.
Operating cash use reflected seasonal working-capital needs: management reported a $121.0 million use from increased net working capital, including a $94.1 million cash outflow from accounts payable. Cash flow was also supported by $60.0 million of revolver borrowings. The quarterly dividend was $0.06 per share. Management stated that operating cash flow and, if needed, revolver borrowings are expected to be sufficient for working-capital needs for the foreseeable future.
Outlook, restructuring and risks
- The filing provides no quantified revenue or earnings guidance. Management expected excess operating cash flow, if any, to support organic growth, debt reduction, dividends, share repurchases and acquisitions.
- The 2014 consumer-direct realignment was completed in Q1 FY2016. Cumulative costs were $49.5 million; the plan closed 136 stores and is expected to provide approximately $16.0 million in annual pretax benefits. The remaining reserve was expected to be settled during the rest of FY2016.
- Additional organizational changes incurred $3.3 million of restructuring costs in the quarter, with another $4.5 million to $5.5 million expected for the remainder of FY2016. The company also recorded $0.3 million related to winding down Cushe.
- Future operating results below projections could trigger a non-cash impairment of indefinite-lived trade names, particularly Sperry, whose reported carrying value was $586.8 million. The filing said Q1 results met the company’s plan.
- Other notable exposures include currency and interest-rate movements, consumer demand and inventory management, foreign sourcing and supply-chain disruptions, customer concentration or losses, and legal and environmental claims. Management did not expect pending litigation or tax audits to have a material adverse effect; remediation liabilities for environmental matters were not yet fixed.
- Foreign earnings are intended to remain permanently reinvested abroad; repatriation could create additional U.S. tax liability. Management reported no material change in risk factors from the 2015 Form 10-K and stated disclosure controls were effective.
Key facts for investors to verify
- Whether sales and segment profitability recover, especially for Sperry, Saucony, Cat and Wolverine, and whether customer inventory levels normalize.
- Whether the company realizes the projected $16.0 million annual savings from the completed consumer-direct plan and completes the additional restructuring within the stated cost range.
- Whether seasonal working-capital outflows reverse and operating cash flow improves without continued reliance on revolver borrowings.
- Debt and covenant headroom, interest-rate exposure, and the effect of currency movements on sales, margins and hedges.
- Performance against the company’s projections supporting the Sperry and Stride Rite trade-name values, and any resulting impairment charge.
- Potential tax consequences if foreign earnings are repatriated, and developments in environmental, legal and tax matters.