Wolverine World Wide, Inc. — Form 10-Q
Reporting period: Second fiscal quarter (12 weeks) ended June 16, 2012; year-to-date figures cover 24 weeks. The filing compares these periods with the corresponding periods ended June 18, 2011. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted.
Business context
Wolverine designs, sources, markets and licenses footwear, apparel and accessories through a portfolio of 12 brands, including Merrell, Wolverine, Hush Puppies, Chaco and Bates. It also operates consumer-direct retail and e-commerce businesses and Wolverine Leathers. At quarter-end, it operated 100 stores and 38 consumer-direct websites.
Financial results and liquidity
| Metric | Q2 2012 | Q2 2011 | 24 weeks 2012 | 24 weeks 2011 |
|---|---|---|---|---|
| Revenue | $312.7 | $310.1 | $635.5 | $641.0 |
| Gross profit / margin | $118.1 / 37.8% | $122.1 / 39.4% | $250.3 / 39.4% | $259.9 / 40.5% |
| Operating profit | $22.8 | $33.4 | $59.8 | $82.8 |
| Net earnings attributable to Wolverine | $20.5 | $24.0 | $51.7 | $59.8 |
| Diluted EPS | $0.42 | $0.48 | $1.05 | $1.20 |
| Operating cash flow | Not presented for quarter alone | $15.5 | $(19.7) |
- Q2 SG&A was $95.2 million, or 30.4% of revenue, versus $88.8 million, or 28.6%. Q2 pretax income was $21.9 million versus $32.3 million.
- Q2 effective tax rate was 7.0%, compared with 25.7%; the lower rate included a $3.3 million benefit from a favorable foreign tax court decision. The year-to-date rate was 10.4%, versus 27.1%, including $9.0 million of benefits from favorable foreign tax decisions.
- At June 16, cash was $156.6 million; current assets were $675.3 million and current liabilities $160.5 million. Inventory was $243.9 million. These balances include seasonal working-capital movements.
- Interest-bearing debt was $28.0 million, all drawn under the revolving credit facility, compared with $20.5 million at June 18, 2011. The facility’s initial aggregate capacity was $150 million, potentially increasable to $225 million. The company reported compliance with its debt covenants.
- Year-to-date capital expenditures were $4.7 million. Cash dividends declared were $0.12 per share in Q2 and $0.24 per share year to date.
Changes versus comparable periods
- Q2 revenue rose 0.8%, but Q2 net earnings attributable to Wolverine fell 14.6% and diluted EPS declined 12.5%. For the first 24 weeks, revenue fell 0.9%, net earnings fell 13.5% and diluted EPS declined 12.5%.
- Gross margin contracted 160 basis points in Q2 and 110 basis points year to date. Management attributed pressure to higher product input costs and unfavorable sales mix, including more closeout sales; strategic price increases and foreign exchange partially offset the impact.
- Q2 operating expenses rose $6.4 million, including $4.9 million of pending-acquisition expenses and $2.4 million of incremental non-cash pension expense. Year-to-date expenses rose $13.4 million, also reflecting added retail-store costs, employee separation costs, higher bad-debt expense and brand investments.
- Q2 branded footwear, apparel and licensing revenue was nearly flat; other business-unit revenue increased 8.3%, led by consumer-direct growth. Europe and Canada remained weak, and foreign exchange reduced reported revenue by $3.8 million in Q2 and $5.9 million year to date. U.S. wholesale and consumer-direct growth partly offset those pressures.
- Year-to-date operating cash flow improved by $35.2 million from the prior-year period, mainly due to lower working-capital investment and pension contributions, despite lower earnings. The company contributed $26.7 million to pensions, versus $31.8 million a year earlier.
Outlook, risks and unusual items
- Management expected operating cash flow and available revolving credit to meet foreseeable working-capital needs, except for the funding required for the proposed PLG acquisition. It gave no specific revenue or earnings guidance in the provided filing text.
- Wolverine agreed to acquire Collective Brands’ Performance + Lifestyle Group for approximately $1.233 billion in cash, subject to adjustments, and anticipated closing in fiscal 2012. Closing depended on the related merger being completed. The transaction was not subject to a financing condition, but committed financing had conditions and the filing warned financing might not be available as expected.
- The proposed acquisition would substantially increase indebtedness and could constrain flexibility through restrictive debt covenants. If certain merger conditions failed, Wolverine could owe all or part of an $84 million reverse termination fee and/or reimburse specified expenses. Integration, execution, transaction costs and realizing expected benefits were also identified risks.
- Five Delaware lawsuits and one Kansas lawsuit challenged the merger; plaintiffs sought to block closing, among other remedies. Wolverine said it was vigorously defending the cases. Management assessed other routine legal and environmental matters as not expected to materially adversely affect the company.
- Other notable exposures include foreign-currency movements, pension expense and funding, overseas tax treatment, changing consumer demand, European market conditions, and supply issues at an Asian third-party tannery affecting Wolverine Leathers. The company had $109.0 million notional of foreign-currency forward contracts outstanding, with maturities up to 336 days.
Most important facts for investors to verify
- Whether the PLG transaction closed as expected, its final purchase price and financing structure, and the resulting leverage and covenant headroom.
- Whether weak European and Canadian demand, closeout activity and product-cost pressures persisted, and whether gross margins recovered.
- How much earnings improvement was attributable to the one-time foreign tax ruling; the filing warns that repatriation of certain foreign earnings could create additional U.S. tax liability.
- Whether operating cash flow remains adequate given seasonal working capital, pension funding and acquisition-related funding needs.
- The outcome and potential financial impact of merger litigation and the company’s ability to integrate PLG and achieve expected benefits.